As filed with the
Securities and Exchange Commission on February 10, 2020
Registration Nos.
333-231951 and 333-234673
UNITED STATES
SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C. 20549
___________________
POST-EFFECTIVE AMENDMENT
NO. 4
TO
FORM S-1
REGISTRATION
STATEMENT
Under
THE SECURITIES ACT OF
1933
___________________
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EMERALD BIOSCIENCE, INC.
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(Exact Name of Registrant as
Specified in its Charter)
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___________________
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Nevada
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2834
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45-0692882
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(State or other jurisdiction
of
incorporation or
organization)
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(Primary Standard
Industrial
Classification Code
Number)
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(I.R.S. Employer
Identification Number)
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130 North Marina
Drive
Long Beach, CA
90803
(949)
336-3443
(Address, including zip
code, and telephone number, including area code, of registrant’s
principal executive offices)
___________________
Dr. Brian
Murphy
Chief Executive
Officer
Emerald Bioscience,
Inc.
130 North Marina
Drive
Long Beach, CA
90803
(949)
336-3443
(Name, address, including
zip code, and telephone number, including area code, of agent for
service)
___________________
Copies of all
correspondence to:
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Douglas Cesario
Chief Financial Officer
Emerald Bioscience, Inc.
130 North Marina Drive
Long Beach, CA 90803
Tel: (949) 336-3443
Fax: (949) 266-0346
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Mark C. Lee, Esq.
Greenberg Traurig, LLP
1201 K Street, Suite 1100
Sacramento, CA 95814
(916) 868 - 063 0
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Approximate date
of commencement of proposed sale to the public: As soon as
practicable after the effective date of this registration
statement.
If any of the securities
being registered on this Form are to be offered on a delayed or
continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box. x
If this Form is filed to
register additional securities for an offering pursuant to Rule
462(b) under the Securities Act, please check the following box and
list the Securities Act registration statement number of the
earlier effective registration statement for the same offering.
¨
If this Form is a
post-effective amendment filed pursuant to Rule 462(c) under the
Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration
statement for the same offering. ¨ (Registration Nos.
333-231951 and 333-234673)
If this Form is a
post-effective amendment filed pursuant to Rule 462(d) under the
Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration
statement for the same offering. ¨
Indicate by check mark
whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, a smaller reporting company or an
emerging growth company. See the definitions of “large accelerated
filer,” “accelerated filer,” “smaller reporting company” and
“emerging growth company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer
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¨
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Accelerated filer
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¨
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Non-accelerated filer
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x
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Smaller reporting
company
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x
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Emerging growth company
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¨
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If an emerging growth
company, indicate by check mark if the registrant has elected not
to use the extended transition period for complying with any new or
revised financial accounting standards provided to Section
7(a)(2)(B) of the Securities Act. ¨
CALCULATION OF
REGISTRATION FEE
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Title of Each Class of
Securities to be Registered (1)
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Proposed Maximum Aggregate
Offering Price (2)
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Amount of
Registration
Fee (4)
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Units, each unit consisting
of:
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$
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5,000,000
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$
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849.00
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One share of common stock,
par value $0.001 (3)
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—
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—
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One warrant to purchase one
share of common stock (3 ) (8)
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—
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—
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Common stock issuable upon
exercise of the warrants included as part of the units
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7,000,000
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$
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908.60
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Pre-funded warrants to
purchase shares of common stock and common stock issuable upon
exercise thereof (6)(8)
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—
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—
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Placement Agent’s Warrants
to purchase shares of common stock and common stock issuable upon
exercise thereof (7)(8)
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434,000
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$
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56.33
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Total
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$
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12,434,000
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(2)
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$
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1,619.93
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(5)
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_____________
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(1)
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In accordance with Rule
416(a), this Registration Statement also covers an indeterminate
number of shares that may be issued and resold resulting from stock
splits, stock dividends or similar transactions.
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(2)
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Estimated solely for the
purpose of calculating the registration fee under Rule 457(o) of
the Securities Act of 1933, as amended (“Securities Act”).
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(3)
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No fee required pursuant to
Rule 457(g).
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(4)
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Calculated pursuant to Rule
457(o) based on an estimate of the proposed maximum aggregate
offering price.
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(5)
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Previously paid in
connection with the registration of aggregate amount of $40,440,000
of the units, consisting of (i) $33,750,000 of the units on the
registrant’s Registration Statement on Form S-1 (File No.
333-231951), for which a filing fee of $4,380.75 was paid, and (ii)
an additional $6,690,000 of the units on the registrant’s
Registration Statement on Form S-1 (File No. 333-234673), for which
a filing fee of $876.15 was paid. As of the day hereof, $35,640,000
of the units remain unsold. See “Explanatory Note”
below.
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(6)
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The proposed maximum
aggregate offering price of the common stock proposed to be sold in
the offering will be reduced on a dollar-for-dollar basis based on
the aggregate offering price of the pre-funded warrants offered and
sold in the offering (plus the aggregate exercise price of the
common stock issuable upon exercise of the pre-funded warrants),
and as such the proposed aggregate maximum offering price of the
common stock and pre-funded warrants (including the common stock
issuable upon exercise of the pre-funded warrants), if any, is
$5,000,000.
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(7)
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Represents warrants issuable to H.C.
Wainwright & Co., LLC, or the Placement Agent’s Warrants, to
purchase a number of shares of common stock equal to 7.0% of the
aggregate number of shares of common stock (or common stock
equivalent, if applicable, but shall not include any shares of
common stock underlying warrants issued in each Offering (other
than pre-funded warrants) being offered at an exercise price equal
to 125% of the public offering price of the common stock. See
“Plan of Distribution.”
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(8)
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Resales of the common stock
warrants, the pre-funded warrants and the Placement Agent’s
Warrants on a delayed or continuous basis pursuant to Rule 415
under the Securities Act of 1933, as amended, are registered
hereby. Resales of shares of common stock issuable upon exercise of
the Placement Agent’s Warrants, the pre-funded warrants and the
common stock warrants are also being registered on a delayed or
continuous basis hereby.
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The
registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the
registrant shall file a further amendment which specifically states
that this Registration Statement shall thereafter become effective
in accordance with Section 8(a) of the Securities Act or until the
Registration Statement shall become effective on such date as the
SEC, acting pursuant to said Section 8(a), may determine.
EXPLANATORY
NOTE
The registrant is filing
this Post-Effective Amendment No. 4 to Form S-1 to amend its
registration statements (Registration Nos. 333-231951 and
333-234673), initially filed with the Securities and Exchange
Commission (the “SEC”) on June 4, 2019 and November 13, 2019,
respectively (the “Registration Statements”) , include a placement
agent, and include pre-funded warrants and placement agent
warrants.
The Registration Statements initially
registered the sale of an aggregate amount of $40,440,000 of
securities (consisting of $33,750,000 registered under Registration
Statement No. 333-231951 and $6,690,000 registered under
Registration Statement No. 333-234673). As of the date hereof,
$4,800,000 of the aggregate amount of such registered securities
have been sold pursuant to the securities purchase agreement
described in the current report on the Form 8-K filed with the SEC
on November 21, 2019, and $35,640,000 of the aggregate amount of
such securities remain unsold . A portion of such unsold securities
is expected to be offered and sold pursuant to a final
prospectus.
No additional amount of securities is being
registered under this Post-Effective Amendment No. 4. All
applicable registration fees were paid at the time of the original
filing of the Registration Statements.
The information in this
prospectus is not complete and may be changed. We may not sell
these securities until the Registration Statement filed with the
Securities and Exchange Commission is effective. This prospectus is
not an offer to sell these securities and it is not soliciting an
offer to buy these securities in any State where the offer or sale
is not permitted.
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PRELIMINARY
PROSPECTUS
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SUBJECT TO COMPLETION, DATED
FEBRUARY __, 2020 |
EMERALD BIOSCIENCE,
INC.
Up to 20,000,000 of
Units, each consisting of
(A) One Share of Common Stock or One Pre-Funded
Warrant to Purchase One Share of Common Stock and
(B) One Warrant to Purchase One Share of Common
Stock
and
Placement Agent
Warrants to Purchase up to 1,400,000 Shares of Common Stock
We are offering, on a “best efforts” basis,
up to 20,000,000 units at a price per unit of $___, each unit
consisting of (i) one share of our common stock or one pre-funded
warrant to purchase one share of common stock , and (ii) one
warrant to purchase one share of common stock. Each warrant will
entitle the holder to purchase one share of common stock. The
warrants will expire five years from the date of issuance. The
pre-funded warrants will be exercisable immediately and may be
exercised at any time until all of the pre-funded warrants are
exercised in full. This offering also relates to the shares of
common stock issuable upon exercise of any pre-funded warrants sold
in this offering. For each prefunded warrant we sell, the number of
shares of common stock we are offering will be decreased on a
one-for-one basis. The units will not be issued or certificated.
Instead, the shares of common stock or pre-funded warrants and the
warrants underlying the units will be issued separately and may be
resold separately, although they will have been purchased together
in this offering. There is no minimum number of units required to
be purchased, and subscriptions, once received and accepted, are
irrevocable. Because there is no minimum offering amount required
as a condition to closing in this offering, the actual public
offering amount and proceeds to us, if any, are not presently
determinable and may be substantially less than all of the units
offered hereby.
We are also offering to
certain purchasers whose purchase of shares of common stock in this
offering would otherwise result in the purchaser, together with its
affiliates and certain related parties, beneficially owning more
than 4.99% (or, at the election of the purchaser, 9.99%) of our
outstanding common stock immediately following the consummation of
this offering, the opportunity to purchase, if any such purchaser
so chooses, pre-funded warrants, in lieu of shares of common stock
that would otherwise result in such purchaser’s beneficial
ownership exceeding 4.99% (or, at the election of the purchaser,
9.99%) of our outstanding common stock. The purchase price of each
pre-funded warrant will be equal to the price at which a share of
common stock is sold to the public in this offering, minus $0.001,
and the exercise price of each pre-funded warrant will be $0.001
per share. The pre-funded warrants will be immediately exercisable
and may be exercised at any time until all of the pre-funded
warrants are exercised in full. For each pre-funded warrant we
sell, the number of shares of common stock we are offering will be
decreased on a one-for-one basis. Therefore, the number of common
stock warrants sold in this offering will not change as a result of
a change in the mix of the shares of our common stock and
pre-funded warrants sold. The shares of common stock and pre-funded
warrants, and the accompanying common stock warrants, can only be
purchased together in this offering but will be issued separately
and will be immediately separable upon issuance. Each common
warrant will have an exercise price of $[___] per share of common
stock, will be exercisable upon issuance and will expire five years
from the date of issuance .
This offering is being conducted on a
best efforts basis. There is no minimum number of securities or
minimum aggregate amount of proceeds for this offering to close .
All funds that we raise from the offering will be immediately
available for our use and will not be returned to investors. We do
not have any arrangements to place the funds received from the sale
of units in the offering in an escrow, trust or similar
account.
The offering will end on
April 30, 2020, unless all of the units are sold before that date,
we extend the offering another 30 days or we otherwise decide to
terminate the offering early or cancel it, in each case in our sole
discretion. If we extend the offering, we will provide that
information in an amendment to this prospectus. If we close the
offering early or cancel it, including during any extended offering
period, we may do so without notice to investors, although if we
cancel the offering we will promptly return any funds investors may
already have paid. We will bear the expenses relating to the
registration of the units.
Our common stock is quoted on the OTCQB
under the symbol “EMBI”. On February 6, 2020, the closing price of
our common stock on the OTCQB was $ 0.16 per share.
The assumed public
offering price used herein is $0.25 per unit, and the resulting
number of units offered hereby as reflected in this prospectus, has
been arbitrarily determined and is approximately based on the
reported sale price of our common stock on December 20, 2019.
However, the final public offering price and the exercise price of
the warrants will be a negotiated price and the final number of
units being offered hereby will be based on such negotiated
offering price.
There is no established public trading
market for the pre-funded warrants, the common stock warrants and
the Placement Agent’s Warrants and we do not expect a market to
develop. Without an active trading market, the liquidity of the
warrants will be limited. In addition, we do not intend to list the
pre-funded warrants, common stock warrants or the Placement Agent’s
Warrants on any national securities exchange or any other trading
system.
We engaged H.C. Wainwright & Co., LLC as
our exclusive placement agent to use its reasonable best efforts to
solicit offers to purchase the securities in this offering. The
Placement Agent has no obligation to buy any of the securities from
us or to arrange for the purchase or sale of any specific number or
dollar amount of the securities. We have agreed to pay the
placement agent the placement agent fees set forth in the table
below, which assumes that we sell all of the securities we are
offering. Because there is no minimum offering amount required as a
condition to closing in this offering, the actual offering amount,
placement agent’s fees, and proceeds to us, if any, are not
presently determinable and may be substantially less than the total
maximum offering amounts set forth below.
Investing in our
securities involves a high degree of risk. You should review
carefully the risks and uncertainties described under the heading
“Risk Factors” beginning on page 7 of this prospectus, and under
similar headings in any amendments or supplements to this
prospectus.
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Per Unit
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Total
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Public offering price
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$
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0.25
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$
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5,000,000
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Placement Agent’s cash fee (1)
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$
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0.02
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$
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375,000
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Proceeds, before expenses , to us (2)
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$ |
0.23
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$ |
4,625,000
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____________
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(1)
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We have agreed to reimburse
H.C. Wainwright & Co., LLC, or the Placement Agent, for certain
of its expenses. In addition, we have agreed to issue to the
Placement Agent warrants to purchase up to a number of shares of
our common stock equal to 7.0% of the number of shares of common
stock and pre-funded warrants sold in this offering. See “Plan
of Distribution” for additional information and a description
of the compensation payable to the Placement Agent.
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(2)
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We estimate the total
expenses of this offering payable by us, excluding the Placement
Agent’s cash fee, will be approximately $312,900.
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Neither the
Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or
determined if this prospectus is truthful or complete. Any
representation to the contrary is a criminal offense.
Delivery of the
securities to the purchaser is expected to be made on or about
________, 2020, subject to the satisfaction of certain closing
conditions.
H.C. Wainwright & Co.
The date of this
prospectus is __________, 2020
TABLE OF CONTENTS
You should rely only on the information contained in this
prospectus. Neither we nor the Placement Agent have authorized any
other person , other than the Placement Agent, to provide you with
information that is different from that contained in this
prospectus. If anyone provides you with different or inconsistent
information, you should not rely on it. We take no responsibility
for, and can provide no assurance as to the reliability of, any
other information that others may give you. You should assume that
the information contained in this prospectus is accurate only as of
the date of this prospectus, regardless of the time of delivery of
this prospectus or of any sale of our securities. Our business,
financial condition, results of operations and prospects may have
changed since that date.
PROSPECTUS SUMMARY
This summary highlights selected information contained elsewhere
in this prospectus. This summary does not contain all the
information that you should consider before investing in our
securities. You should carefully read the entire prospectus
including “Risk Factors,” “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” and our Financial
Statements, before making an investment decision.
In
this prospectus, unless otherwise specified, the terms “we,” “us,”
“our,” “Company” and “Emerald Bioscience” mean Emerald Bioscience,
Inc., a Nevada corporation, and our wholly-owned subsidiaries.
Corporate
Overview
We
are a biopharmaceutical company targeting the discovery,
development and commercialization of cannabinoid-based therapeutics
through a number of license agreements with the University of
Mississippi (“UM”) holds the only contract to cultivate cannabis
for research purposes on behalf of the Federal Government of the
United States since 1968, and it has significant expertise in
cannabis cultivation and the extraction, separation, processing and
manufacture of cannabis extracts as well as the chemistry and
physiology of cannabinoid molecules. We were established as, and
continue to be, a development and commercialization partner of UM,
working to bring the University’s proprietary cannabinoid molecules
through the development process.
Corporate
Information
Our
principal executive offices are located at 130 North Marina Drive,
Long Beach, CA 90803. Our telephone number is (949) 336-3443. Our
website address is http://emeraldbio.life. The information on, or
that can be accessed through, our website is not part of this
prospectus.
THE OFFERING
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Common stock offered by us
in this offering
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20,000,000 shares (based on an assumed
offering price of $0.25 per share)
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Pre-funded warrants offered by us in this
offering
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We are also offering to
certain purchasers whose purchase of shares of common stock in this
offering would otherwise result in the purchaser, together with its
affiliates and certain related parties, beneficially owning more
than 4.99% (or, at the election of the purchaser, 9.99%) of our
outstanding common stock immediately following the closing of this
offering, the opportunity to purchase, if such purchasers so
choose, pre-funded warrants to purchase shares of common stock, in
lieu of shares of common stock that would otherwise result in any
such purchaser's beneficial ownership exceeding 4.99% (or, at the
election of the purchaser, 9.99%) of our outstanding common stock.
Each pre-funded warrant will be exercisable for one share of our
common stock. The purchase price of each pre-funded warrant and
accompanying common warrant (as described below) will be equal to
the price at which a share of common stock and accompanying common
warrant is being sold to the public in this offering, minus $0.001,
and the exercise price of each pre-funded warrant will be $0.001
per share. The pre-funded warrants will be exercisable immediately
and may be exercised at any time until all of the pre-funded
warrants are exercised in full. This offering also relates to the
shares of common stock issuable upon exercise of any pre-funded
warrants sold in this offering. For each pre-funded warrant we
sell, the number of shares of common stock we are offering will be
decreased on a one-for-one basis. Because we will issue a common
warrant for each share of our common stock and for each pre-funded
warrant to purchase one share of our common stock sold in this
offering, the number of common stock warrants sold in this offering
will not change as a result of a change in the mix of the shares of
our common stock and pre-funded warrants sold.
For more information, see
the section entitled “Description of Securities” on
page 7 of this prospectus.
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Common stock warrants offered by us in this
offering
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Warrants to purchase up to
20,000,000 shares (based on an assumed exercise price of $0.35 per
share), which may be exercised beginning on their date of issuance.
The warrants are exercisable until the five-year anniversary of the
original issuance date. The warrants have an exercise price of $
per share of common stock, subject to adjustment.
For more information, see
the section entitled “Description of Securities” on
page 7 of this prospectus.
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Common stock to be outstanding after this
offering
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202,895,247 shares (based on
an assumed offering price of $0.25 per share), assuming no sales of
pre-funded warrants, which, if sold, would reduce the number of
shares of common stock that we are offering on a one-for-one basis
and assuming no exercise of any common stock warrants issued in
this offering.
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Use of proceeds
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We intend to use the net
proceeds from this offering for general corporate purposes,
including working capital. We may use the net proceeds from this
offering to fund possible acquisitions of other companies, products
or technologies, though no such acquisitions are currently
contemplated. In addition, a portion of the proceeds raised may be
used to pay, in whole or in part, the principal and/or the accrued
interest on our Credit Agreement. See “Use of Proceeds” on
page 33 of this prospectus.
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Best efforts
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We have retained H.C.
Wainwright & Co., LLC as our exclusive placement agent in
connection with the securities offered by this prospectus. The
placement agent has agreed to use its reasonable best efforts to
solicit offers to purchase the securities offered by this
prospectus. The placement agent has no obligation to buy any of the
securities from us or to arrange for the purchase or sale of any
specific number or dollar amount of the securities. See “Plan of
Distribution” on page 35 of this prospectus.
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Risk factors
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See “Risk Factors” beginning on page
7 and the other information included elsewhere in this prospectus
for a discussion of factors you should carefully consider before
deciding to invest in our equity securities.
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INCORPORATION BY
REFERENCE
The
SEC allows us to “incorporate by reference” into this prospectus
the information in other documents that we file with it, including
at a subsequent date. The information incorporated by reference is
considered to be a part of this prospectus, and information in
documents that we file later with the SEC will automatically update
and supersede information contained in documents filed earlier with
the SEC or contained in this prospectus. In addition to documents
referenced as incorporated by reference elsewhere in this
prospectus, we incorporate by reference herein all documents
subsequently filed by us with the SEC pursuant to Sections 13(a),
13(c), 14 or 15(d) of the Exchange Act, prior to the termination of
the offering; provided, however, that we are not incorporating, in
each case, any documents or information deemed to have been
furnished and not filed in accordance with SEC rules.
RISK FACTORS
Any investment in our securities involves a high degree of risk.
Investors should carefully consider the risks described below and
all of the information contained in this prospectus before deciding
whether to purchase our securities. Our business, financial
condition or results of operations could be materially adversely
affected by these risks if any of them actually occur. Our common
stock is quoted on the OTCQB under the symbol. This market is
extremely limited and the prices quoted are not a reliable
indication of the value of our common stock. As of the date of this
prospectus, there has been very limited trading of shares of our
common stock. If and when our common stock is traded, the trading
price could decline due to any of these risks, and an investor may
lose all or part of his or her investment. Some of these factors
have affected our financial condition and operating results in the
past or are currently affecting us. This prospectus also contains
forward-looking statements that involve risks and uncertainties.
Our actual results could differ materially from those anticipated
in these forward-looking statements as a result of certain factors,
including the risks described below and elsewhere in this
prospectus
Risks Related to this
Offering:
This is a “best
efforts” offering, no minimum amount of securities is required to
be sold, and we may not raise the amount of capital we believe is
required for our business plans.
The Placement Agent has
agreed to use its reasonable best efforts to solicit offers to
purchase the securities in this offering. The Placement Agent has
no obligation to buy any of the securities from us or to arrange
for the purchase or sale of any specific number or dollar amount of
the securities. There is no required minimum number of securities
that must be sold as a condition to completion of this offering.
Because there is no minimum offering amount required as a condition
to the closing of this offering, the actual offering amount,
Placement Agent fees and proceeds to us are not presently
determinable and may be substantially less than the maximum amounts
set forth above. We may sell fewer than all of the securities
offered hereby, which may significantly reduce the amount of
proceeds received by us, and investors in this offering will not
receive a refund in the event that we do not sell any minimum
amount of securities. Thus, we may not raise the amount of capital
we believe is required for our operations in the short-term and may
need to raise additional funds, which may not be available or
available on terms acceptable to us.
If you purchase
our common stock, pre-funded warrants and common stock warrants in
this offering, you will incur immediate and substantial dilution in
the book value of your shares.
The combined public
offering price in this offering is substantially higher than the
net tangible book value per share of our common stock. Investors
purchasing common stock and warrants in this offering will pay a
price per share that substantially exceeds the book value of our
tangible assets after subtracting our liabilities. As a result,
investors purchasing common stock and warrants in this offering
will incur immediate dilution of $0.33 per share, based on the
assumed combined public offering price of $0.25 per share.
As a result of the
dilution to investors purchasing shares in this offering, investors
may receive significantly less than the purchase price paid in this
offering, if anything, in the event of our liquidation. For a
further description of the dilution that you will incur as a result
of purchasing shares in this offering, see “Dilution.”
The pre-funded
warrants and common stock warrants are speculative in
nature.
Neither the pre-funded
warrants nor the common stock warrants offered hereby confer any
rights of common stock ownership on their holders, such as voting
rights or the right to receive dividends, but rather merely
represent the right to acquire shares of common stock at a fixed
price. Specifically, commencing on the date of issuance, holders of
the pre-funded warrants may acquire the common stock issuable upon
exercise of such warrants at an exercise price of $[__] per share
of common stock and holders of the common stock warrants may
acquire the common stock issuable upon exercise of such warrants at
an exercise price of $[__] per share. Moreover, following this
offering, the market value of the pre-funded warrants and common
stock warrants is uncertain and there can be no assurance that the
market value of the pre-funded warrants or the common stock
warrants will equal or exceed their public offering price. There
can be no assurance that the market price of the common stock will
ever equal or exceed the exercise price of the pre-funded warrants
or common stock warrants, and consequently, whether it will ever be
profitable for holders of the pre-funded warrants to exercise the
pre-funded warrants or the holders of the common stock warrants to
exercise the common stock warrants.
Holders of the
pre-funded warrants and common stock warrants will have no voting
rights as common stockholders until they acquire our common
stock.
Until you acquire shares
of our common stock upon exercise of the pre-funded warrants and
common stock warrants, you will have no voting rights with respect
to our common stock issuable upon exercise of the pre-funded
warrants or common stock warrants. Upon exercise of your pre-funded
warrants or common stock warrants, you will be entitled to exercise
all the voting rights of a common stockholder only as to matters
for which the record date occurs after the exercise date.
Significant
holders or beneficial holders of our common stock may not be
permitted to exercise pre-funded warrants or common stock warrants
that they hold.
The pre-funded warrants
and common stock warrants being offered hereby will prohibit a
holder from exercising its pre-funded warrants or common stock
warrants if doing so would result in such holder (together with
such holder’s affiliates and any other persons acting as a group
together with such holder or any of such holder’s affiliates)
beneficially owning more than 4.99% of our common stock outstanding
immediately after giving effect to the exercise, provided that, at
the election of a holder and notice to us, such beneficial
ownership limitation as to such holder shall be 9.99% of our common
stock outstanding immediately after giving effect to the exercise.
As a result, if you hold a significant amount of our securities,
you may not be able to exercise your pre-funded warrants or common
stock warrants for shares of our common stock, in whole or in part,
at a time when it would be financially beneficial for you to do
so.
There is no public
market for the pre-funded warrants or common stock warrants to
purchase shares of our common stock being included in the units
offered in this offering.
There is no public trading market for the
pre-funded warrants or common stock warrants included as part of
the units being offered in this offering, and we do not expect a
market to develop. In addition, we do not intend to apply to list
the pre-funded warrants or common stock warrants on any national
securities exchange or other nationally recognized trading system.
Without an active market, the liquidity of the pre-funded warrants
or common stock warrants will be limited, and you may not be able
to resell your warrants. If your warrants cannot be resold, you
will have to depend upon any appreciation in the value of our
common stock over the exercise price of the warrants in order to
realize a return on your investment in the warrants.
Except as
otherwise provided in the pre-funded warrants or common stock
warrants, holders of our pre-funded warrants or common stock
warrants will not have the rights or privileges of a holder of our
common stock, including any voting rights, until such holders
exercise their warrants and acquire our common stock.
Except as otherwise provided in the
pre-funded warrants or common stock warrants, holders of our
pre-funded warrants or common stock warrants will not have the
rights or privileges of a holder of our common stock, including any
voting rights, until such holders exercise their warrants and
acquire our common stock. As a result, absent exercise of the
pre-funded warrants or common stock warrants , holders of the
pre-funded warrants or common stock warrants will not have the
ability to vote their shares underlying the pre-funded warrants or
common stock warrants, which may limit the influence that investors
in our offering may have over the outcome of matters submitted to
our stockholders for a vote.
Because our
management will have broad discretion and flexibility in how the
net proceeds from this offering are used, we may use the net
proceeds in ways in which you disagree.
We currently intend to
use the net proceeds from this offering for general corporate
purposes, including working capital. We have not allocated specific
amounts of the net proceeds from this offering for any of the
foregoing purposes. Accordingly, our management will have
significant discretion and flexibility in applying the net proceeds
of this offering. You will be relying on the judgment of our
management with regard to the use of these net proceeds, and you
will not have the opportunity, as part of your investment decision,
to assess whether the net proceeds are being used appropriately. It
is possible that the net proceeds will be invested in a way that
does not yield a favorable, or any, return for us. The failure of
our management to use such funds effectively could have a material
adverse effect on our business, financial condition, operating
results and cash flow.
Risks Related to our
Business and Capital Requirements:
Since we have a
limited operating history in our business, it is difficult for
potential investors to evaluate our business.
Our short operating
history may hinder our ability to successfully meet our objectives
and makes it difficult for potential investors to evaluate our
business or prospective operations. We have not generated any
revenues since inception and we are not currently profitable and
may never become profitable. As an early stage company, we are
subject to all the risks inherent in the financing, expenditures,
operations, complications and delays inherent in a new business.
Accordingly, our business and success face risks from uncertainties
faced by developing companies in a competitive environment. There
can be no assurance that our efforts will be successful or that we
will ultimately be able to attain profitability.
We currently have
no product revenues and no products approved for marketing and need
substantial additional funding to continue our operations. We may
not be able to raise capital when needed, if at all, which would
force us to delay, reduce or eliminate our product development
programs or commercialization efforts and could cause our business
to fail.
We expect to need
substantial additional funding to pursue the clinical development
of our product candidates and launch and commercialize any product
candidates for which we receive regulatory approval.
We expect that our
existing cash will be sufficient to fund our capital requirements
for at least the next two months. We require additional capital for
the development and commercialization of our product candidates.
Furthermore, we expect to incur additional costs associated with
operating as a public company. We may also encounter unforeseen
expenses, difficulties, complications, delays and other unknown
factors that may increase our capital needs and/or cause us to
spend our cash resources faster than we expect. Accordingly, we
will need to obtain substantial additional funding in order to
continue our operations. As noted in our audited financial
statements for the years ended December 31, 2018 and 2017, the
uncertainties surrounding our ability to fund our operations raise
substantial doubt about our ability to continue as a going
concern.
To date, we have
financed our operations entirely through investments by founders
and other investors. We may seek additional funds through public or
private equity or debt financing, via strategic transactions or
collaborative arrangements. Additional funding from those or other
sources may not be available when or in the amounts needed, on
acceptable terms, or at all. If we raise capital through the sale
of equity, or securities convertible into equity, it would result
in dilution to our then existing stockholders, which could be
significant depending on the price at which we may be able to sell
our securities. If we raise additional capital through the
incurrence of indebtedness, we would likely become subject to
covenants restricting our business activities, and holders of debt
instruments may have rights and privileges senior to those of our
equity investors. In addition, servicing the interest and principal
repayment obligations under debt facilities could divert funds that
would otherwise be available to support research and development,
clinical or commercialization activities. If we obtain capital
through collaborative arrangements, these arrangements could
require us to relinquish rights to our technology or product
candidates and could result in our receipt of only a portion of the
revenues associated with the partnered product.
There are no assurances
that future funding will be available on favorable terms or at all.
If additional funding is not obtained, we may need to reduce, defer
or cancel preclinical and lab work, planned clinical trials, or
overhead expenditures to the extent necessary. The failure to fund
our operating and capital requirements could have a material
adverse effect on our business, financial condition and results of
operations.
If we are unable to
raise capital when needed or on attractive terms, we could be
forced to delay, reduce or eliminate our research and development
programs or any future commercialization efforts. Any of these
events could significantly harm our business, financial condition
and prospects.
Our independent
registered public accounting firm has expressed substantial doubt
about our ability to continue as a going concern.
Our historical financial
statements have been prepared under the assumption that we will
continue as a going concern. Our independent registered public
accounting firm has issued a report on our audited financial
statements for the year ended December 31, 2018 that included an
explanatory paragraph referring to our recurring operating losses
and expressing substantial doubt in our ability to continue as a
going concern. Our ability to continue as a going concern is
dependent upon our ability to obtain additional equity financing or
other capital, attain further operating efficiencies, reduce
expenditures, and, ultimately, generate revenue. Our financial
statements do not include any adjustments that might result from
the outcome of this uncertainty. However, if adequate funds are not
available to us when we need it, we will be required to curtail our
operations which would, in turn, further raise substantial doubt
about our ability to continue as a going concern. The doubt
regarding our potential ability to continue as a going concern may
adversely affect our ability to obtain new financing on reasonable
terms or at all. Additionally, if we are unable to continue as a
going concern, our stockholders may lose some or all of their
investment in the Company.
We rely heavily on
UM for our research and development programs, and UM is joint owner
of the intellectual property resulting from its preclinical
research and development.
We rely heavily on our
relationship with UM for our research and development programs.
Under the terms of our agreements with UM, we are required to fund
preclinical and clinical trials required for cannabinoid-based
products developed by UM. If UM were to terminate one or more of
our agreements, we may be required to return or destroy certain
materials or data developed during our partnership that is
confidential to UM and face substantial delays or possible
termination of the affected program.
In addition, the
agreements provide that all intellectual property rights (including
any patents and non-manufacturing related know-how) that are
conceived by both UM and us during the course of the collaboration
are to be jointly owned by UM and us. Because UM exercises some
control over this jointly owned intellectual property, we may need
to seek UM’s consent to pursue, use, license and/or enforce some of
these intellectual property rights in the future. An unexpected
deterioration in our relationship with UM may have a material
adverse effect on our business, reputation, results of operations
and financial condition.
We are heavily
dependent on the success of our early-stage product candidates,
which will require significant additional efforts to develop and
may prove not to be viable for commercialization.
We are very early in our
development efforts. We have no products approved for sale and all
of our product candidates are in preclinical development including
development of cannabinoid-based formulations. Further preclinical
testing is ongoing and if successful, will be part of a regulatory
filing to satisfy Investigational New Drug (“IND”) requirements
which need to be met in order for the candidate compounds and
routes of administration to enter testing in humans. Our ability to
generate product revenue, which we do not expect will occur for
many years, if ever, will depend heavily on the successful
development and commercialization of our product candidates. Our
business depends entirely on the successful development, clinical
testing and commercialization of these and any other product
candidates we may seek to develop in the future, which may never
occur.
The success of our
product candidates will depend on several factors, any one of which
we may not be able to successfully complete, such as:
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receipt of necessary
controlled substance registrations from the DEA;
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successful completion of
preclinical studies and clinical trials;
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receipt of marketing
approvals from the Food and Drug Administration (the “FDA”) and
other applicable regulatory authorities;
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obtaining, maintaining and
protecting our intellectual property portfolio, including patents
and trade secrets, and regulatory exclusivity for our product
candidates;
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identifying, making
arrangements and ensuring necessary registrations with third-party
manufacturers, or establishing commercial manufacturing
capabilities for applicable product candidates;
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launching commercial sales
of the products, if and when approved, whether alone or in
collaboration with others;
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acceptance of our products,
if and when approved, by patients, the medical community and
third-party payors;
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effectively competing with
other therapies;
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obtaining and maintaining
healthcare coverage and adequate reimbursement of our products;
and
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maintaining a continued
acceptable safety profile of our products following approval.
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If we do not achieve one
or more of these factors in a timely manner or at all, we could
experience significant delays or an inability to successfully
commercialize our product candidates, which would materially harm
our business.
We may not be
successful in our efforts to build a pipeline of product
candidates.
Our strategy is to use
and expand our relationship with UM to build a pipeline of
cannabinoid-based products. We may not be able to develop product
candidates that are safe and effective for all or any of our
targets. Even if we are successful in building a product pipeline,
the potential product candidates that we identify may not be
suitable for clinical development for a number of reasons,
including due to harmful side effects or other characteristics that
indicate a low likelihood of receiving marketing approval or
achieving market acceptance. If our methods of identifying
potential product candidates fail to produce a pipeline of
potentially viable product candidates, then we may not be able to
obtain product revenue in future periods, which would make it
unlikely that we would ever achieve profitability.
We expect to face
intense competition, often from companies with greater resources
and experience than we have.
The pharmaceutical
industry is highly competitive and subject to rapid change. The
industry continues to expand and evolve as an increasing number of
competitors and potential competitors enter the market. Many of
these competitors and potential competitors have substantially
greater financial, technological, managerial and research and
development resources and experience than we have. Some of these
competitors and potential competitors have more experience than we
have in the development of pharmaceutical products, including
validation procedures and regulatory matters. In addition, our
pipeline products, if successfully developed, will compete with
product offerings from large and well-established companies that
have greater marketing and sales experience and capabilities than
we or our collaboration partners have. If we are unable to compete
successfully, we may be unable to grow and sustain our revenue.
We have
substantial capital requirements that, if not met, may hinder our
operations.
We anticipate that we
will make substantial capital expenditures for laboratory and
preclinical work and for future clinical trials. If we cannot raise
sufficient capital, we may have limited ability to expend the
capital necessary to undertake or complete laboratory and
preclinical work and future clinical trials. There can be no
assurance that debt or equity financing will be available or
sufficient to meet these requirements or for other corporate
purposes, or if debt or equity financing is available, that it will
be on terms acceptable to us. Moreover, future activities may
require us to alter our capitalization significantly. Our inability
to access sufficient capital for our operations could have a
material adverse effect on our financial condition, results of
operations or prospects.
Additional capital
may be costly or difficult to obtain.
Additional capital,
whether through the offering of equity or debt securities, may not
be available on reasonable terms or at all, especially in light of
the recent downturn in the economy and dislocations in the credit
and capital markets. If we are unable to obtain required additional
capital, we may have to curtail our growth plans or cut back on
existing business and, further, we may not be able to continue
operating if we do not generate sufficient revenues from operations
needed to stay in business. We may incur substantial costs in
pursuing future capital financing, including investment banking
fees, legal fees, accounting fees, securities law compliance fees,
printing and distribution expenses and other costs. We may also be
required to recognize non-cash expenses in connection with certain
securities we issue, such as convertible notes and warrants, which
may adversely impact our financial condition.
Current global
financial conditions have been characterized by increased
volatility which could negatively impact our business, prospects,
liquidity and financial condition.
Current global financial
conditions and recent market events have been characterized by
increased volatility and the resulting tightening of the credit and
capital markets has reduced the amount of available liquidity and
overall economic activity. We cannot guaranty that debt or equity
financing, the ability to borrow funds or cash generated by
operations will be available or sufficient to meet or satisfy our
initiatives, objectives or requirements. Our inability to access
sufficient amounts of capital on terms acceptable to us for our
operations will negatively impact our business, prospects,
liquidity and financial condition.
If we are not able
to attract and retain highly qualified personnel, we may not be
able to successfully implement our business strategy.
Our ability to compete
in the highly competitive biotechnology and pharmaceuticals
industries depends upon our ability to attract and retain highly
qualified managerial, scientific and medical personnel. Our success
depends in large measure on our key personnel, including Dr. Brian
Murphy, our Chief Executive Officer. The loss of the services of
Dr. Murphy could significantly hinder our operations. We do not
currently have key person insurance in effect for Dr. Murphy. In
addition, the competition for qualified personnel in the
pharmaceutical industry is intense and there can be no assurance
that we will be able to continue to attract and retain all
personnel necessary for the development and operation of our
business.
We may be subject
to claims by third parties asserting that our employees or we have
misappropriated their intellectual property or claiming ownership
of what we regard as our own intellectual property.
Some of our employees
were previously employed at other biotechnology or pharmaceutical
companies, including our competitors or potential competitors.
Although we try to ensure that our employees do not use the
proprietary information or know-how of others in their work for us,
with contractual provisions and other procedures, we may be subject
to claims that these employees or we have used or disclosed
intellectual property, including trade secrets or other proprietary
information, of any such employee’s former employers. Litigation
may be necessary to defend against any such claims.
In addition, while it is
our policy to require our employees and contractors who may be
involved in the development of intellectual property to execute
agreements assigning such intellectual property to us, we may be
unsuccessful in executing such an agreement with each party who in
fact contributes to the development of intellectual property that
we regard as our own. Further, the terms of such assignment
agreements may be breached and we may not be able to successfully
enforce their terms, which may force us to bring claims against
third parties, or defend claims they may bring against us, to
determine the ownership of intellectual property rights we may
regard and treat as our own.
We will need to
grow the size of our organization, and we may experience
difficulties in managing any growth we may achieve.
As of the date of this
prospectus, we have four full-time employees. As our development
and commercialization plans and strategies develop, we expect to
need additional research, development, managerial, operational,
sales, marketing, financial, accounting, legal and other resources.
Future growth would impose significant added responsibilities on
members of management. Our management may not be able to
accommodate those added responsibilities, and our failure to do so
could prevent us from effectively managing future growth, if any,
and successfully growing our company.
If we breach any
of the agreements under which we license from UM the
commercialization rights to our product candidates, we could lose
license rights that are important to our business and our
operations could be materially harmed.
We license from UM the
use, development and commercialization rights for our product
candidates. As a result, our current business plans are dependent
upon our maintenance of the license agreements and the rights we
license under it. If we fail to comply with any of the conditions
or obligations or otherwise breach the terms of our license
agreement with UM, or any future license agreement we may enter on
which our business or product candidates are dependent, UM may have
the right to terminate the applicable agreement in whole or in part
and thereby extinguish our rights to the licensed technology and
intellectual property and/or any rights we have acquired to develop
and commercialize certain product candidates. The loss of the
rights licensed to us under our license agreement with UM, or any
future license agreement that we may enter granting rights on which
our business or product candidates are dependent, would eliminate
our ability to further develop the applicable product candidates
and would materially harm our business, prospects, financial
condition and results of operations.
Our operating
activities may be restricted as a result of covenants related to
the outstanding indebtedness under our Credit Agreement and we may
be required to repay the outstanding indebtedness in an event of
default, which could have a material adverse effect on our
business.
We could default on the
payment of our indebtedness under our Multi-Draw Credit Agreement
entered into with Emerald Health Sciences, Inc. (“Emerald Health
Sciences”), a related party, on October 5, 2018 (the “Credit
Agreement”), when it comes due which may result in acceleration of
all amounts outstanding under our Credit Agreement. Additionally,
our Credit Agreement restricts, among other things, our ability to
incur debt and requires us to comply with certain covenants. We may
not be able to comply with these restrictions and covenants in the
future. Our failure to comply with any of the restrictions and
covenants under our Credit Agreement could result in an event of
default under our Credit Agreement and result in the acceleration
of the maturity of the indebtedness under the Credit Agreement. We
may not have enough available cash or be able to raise additional
funds through equity or debt financings to repay such indebtedness
at the time any such event of default occurs. In that case, we may
be required to delay, limit, reduce or terminate our product
candidate development or commercialization efforts or grant to
others rights to develop and market product candidates that we
would otherwise prefer to develop and market ourselves.
As our products
and company are in a highly regulated industry, significant and
unforeseen changes in policy may have material impacts on our
business.
A primary reason for our
company to develop the cannabis-derived pharmaceuticals is the
changing regulatory and social landscape, in terms of cannabis.
State efforts to decriminalize and/or legalize, as well as the
growth of state level medical marijuana rulings, have created the
opportunity to develop the medical potential for cannabis. However,
cannabis is still illegal on a Federal level, outside of the areas
described above. We do not know what impact might occur to our
development plans, if the Federal law were to change dramatically
in the near-term. While we believe the licensed intellectual
property, the institutional knowledge, and our management
experience will provide us with what is necessary to achieve our
goals, we cannot predict the impact of any changes in the current
regulatory environment
The use of
“medical marijuana” or “recreational marijuana” in the United
States may impact our business.
There is a substantial
amount of change occurring in various states of the United States
regarding the use of “medical marijuana.” While cannabis is a
Schedule I substance as defined under federal law, and its
possession and use is not permitted in accordance with federal law,
a number of individual states have enacted state laws to authorize
possession and use of cannabis for medical purposes, and in some
states for recreational purposes. While our product candidates are
distinct from crude herbal cannabis, our prospects may nevertheless
be impacted by these laws at the state level in the United
States.
As with all medicines,
it is very difficult to gauge accurately market acceptance of our
potential drug candidates. While we are taking and will take
significant efforts in selecting drug candidates that we believe
represent the best opportunities for market adoption, such as
unsatisfied needs, competitive environment, partnering potential,
therapeutic potential, and target product profile potential, the
ultimate market acceptance of a preclinical candidate is very
difficult to predict. The ultimate acceptance will be impacted by
the performance in clinical trials (efficacy and safety),
reimbursement and development of competitive compounds. Also, the
healthcare reimbursement environment has been changing over the
recent past and is likely to continue to evolve. If we are unable
to gain market acceptance for our product candidates, if approved,
then we may not be able to generate substantial product
revenues.
We currently have
no marketing and sales experience or capabilities to market and
sell our product candidates, if approved.
We currently do not have
experience in the marketing, sales and distribution of any of our
product candidates that are able to attain regulatory approval. If
our product candidates receive regulatory approval, we will need to
establish sales and marketing capabilities to commercialize our
product candidates, which will be expensive and time consuming. Any
failure or delay in the development of our internal sales and
marketing capabilities would adversely impact the commercialization
of any of our products that we obtain approval to market. If we are
not successful in commercializing our product candidates, either on
our own or through collaborations with one or more third parties,
our future product revenue will suffer and we may incur significant
additional losses.
Our commercial
success depends upon attaining significant market acceptance of our
product candidates, if approved, among physicians and
patients.
Even if approved by the
FDA, our product candidates may not gain market acceptance among
physicians and patients, which is vital to our commercial success.
Market acceptance of any product candidate for which we receive
approval depends on a number of factors, including:
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the clinical indications for
which the drug is approved and efficacy and safety as demonstrated
in clinical trials;
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the timing of market
introduction of the product candidate and/or competitive
products;
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acceptance of the drug as a
safe and effective treatment by physicians and patients;
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the potential and perceived
advantages of the product candidate over alternative
treatments;
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the cost of treatment in
relation to alternative treatments; and
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the prevalence and severity
of adverse side effects.
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If our product
candidates are approved but fail to achieve an adequate level of
acceptance by physicians and patients, we will not be able to
generate significant revenues, and we may not become or remain
profitable.
We may expend our
limited resources to pursue a particular product candidate or
indication and may fail to capitalize on product candidates or
indications that may be more profitable or for which there is a
greater likelihood of success.
Because we have limited
financial and managerial resources, we must focus our efforts on
particular research programs and product candidates for specific
indications. As a result, we may forego or delay pursuit of
opportunities with other product candidates or for other
indications that later prove to have greater commercial potential.
Our resource allocation decisions may cause us to fail to
capitalize on viable commercial products or profitable market
opportunities. If we do not accurately evaluate the commercial
potential or target market for a particular product candidate, we
may relinquish valuable rights to that product candidate through
collaboration, licensing or other royalty arrangements in cases in
which it would have been more advantageous for us to retain sole
development and commercialization rights to such product candidate.
Any such failure to improperly assess potential product candidates
could result in missed opportunities and/or our focus on product
candidates with low market potential, which would harm our business
and financial condition.
We engage in
transactions with related parties and such transactions present
possible conflicts of interest that could have an adverse effect on
us.
We have entered, and may
continue to enter, into transactions with Emerald Health Sciences
and its affiliates and other related parties for financing,
corporate, business development and operational services. Such
transactions may not have been entered into on an arm’s-length
basis, and we may have achieved more or less favorable terms
because such transactions were entered into with our related
parties. We rely, and will continue to rely, on our related parties
to maintain these services. If the pricing for these services
changes, or if our related parties cease to provide these services,
including by terminating agreements with us, we may be unable to
obtain replacements for these services on the same terms without
disruption to our business. This could have a material effect on
our business, results of operations and financial condition. The
details of certain of these transactions are set forth in “Certain
Relationships and Related Party Transactions.” Related party
transactions create the possibility of conflicts of interest with
regard to our management, including that:
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we may enter into contracts
between us, on the one hand, and related parties, on the other,
that are not the result of arm’s-length transactions;
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our executive officers and
directors that hold positions of responsibility with related
parties may be aware of certain business opportunities that are
appropriate for presentation to us as well as to such other related
parties and may present such business opportunities to such other
parties; and
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our executive officers and
directors that hold positions of responsibility with related
parties may have significant duties with, and spend significant
time serving, other entities and may have conflicts of interest in
allocating time.
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Such conflicts could
cause an individual in our management to seek to advance his or her
economic interests or the economic interests of certain related
parties above ours. Further, the appearance of conflicts of
interest created by related party transactions could impair the
confidence of our investors. Our audit committee reviews these
transactions. Notwithstanding this, it is possible that a conflict
of interest could have a material adverse effect on our liquidity,
results of operations and financial condition.
Risks Related to
Controlled Substances
The product
candidates we are developing will be subject to U.S. controlled
substance laws and regulations and failure to comply with these
laws and regulations, or the cost of compliance with these laws and
regulations, may adversely affect the results of our business
operations, both during non-clinical and clinical development and
post-approval, and our financial condition.
The product candidates
we plan to develop will contain controlled substances as defined in
the CSA. Controlled substances that are pharmaceutical products are
subject to a high degree of regulation under the CSA, which
establishes, among other things, certain registration,
manufacturing quotas, security, recordkeeping, reporting, import,
export and other requirements administered by the DEA. The DEA
classifies controlled substances into five schedules: Schedule I,
II, III, IV or V substances. Schedule I substances by definition
have a high potential for abuse, no currently “accepted medical
use” in the United States, lack accepted safety for use under
medical supervision, and may not be prescribed, marketed or sold in
the United States. Pharmaceutical products approved for use in the
United States may be listed as Schedule II, III, IV or V, with
Schedule II substances considered to present the highest potential
for abuse or dependence and Schedule V substances the lowest
relative risk among such substances. Schedule I and II drugs are
subject to the strictest controls under the CSA, including
manufacturing and procurement quotas, security requirements and
criteria for importation. In addition, dispensing of Schedule II
drugs is further restricted. For example, they may not be refilled
without a new prescription.
While cannabis, cannabis
extracts, and some cannabinoids are Schedule I controlled
substances, products approved for medical use in the United States
that contain cannabis, cannabis extracts or some cannabinoids must
be placed on Schedules II-V, since approval by the FDA satisfies
the “accepted medical use” requirement.
If approved by the FDA,
we expect the finished dosage forms of our cannabinoid-derived drug
product candidates to be listed by the DEA as a Schedule II or III
controlled substance. Consequently, their manufacture, importation,
exportation, domestic distribution, storage, sale and legitimate
use will be subject to a significant degree of regulation by the
DEA. In addition, the scheduling process may take one or more
years, thereby delaying the launch of the drug product in the
United States. Furthermore, if the FDA, DEA, or any foreign
regulatory authority determines that any of our drug product
candidates may have potential for abuse, it may require us to
generate more clinical or other data than we currently anticipate
to establish whether or to what extent the substance has an abuse
potential, which could increase the cost and/or delay the launch of
the drug product.
Facilities conducting
research, manufacturing, distributing, importing or exporting, or
dispensing controlled substances must be registered (licensed) to
perform these activities and have the security, control,
recordkeeping, reporting and inventory mechanisms required by the
DEA to prevent drug loss and diversion. All these facilities must
renew their registrations annually, except dispensing facilities,
which must renew every three years. The DEA conducts periodic
inspections of certain registered establishments that handle
controlled substances. Obtaining the necessary registrations may
result in delay of the manufacturing, development, or distribution
of our product candidates. Furthermore, failure to maintain
compliance with the CSA, particularly non-compliance resulting in
loss or diversion, can result in regulatory action that could have
a material adverse effect on our business, financial condition and
results of operations. The DEA may seek civil penalties, refuse to
renew necessary registrations, or initiate proceedings to restrict,
suspend or revoke those registrations. In certain circumstances,
violations could lead to criminal proceedings. Individual states
have also established controlled substance laws and regulations.
Though state-controlled substances laws often mirror federal law,
because the states are separate jurisdictions, they may separately
schedule our product candidates. While some states automatically
schedule a drug based on federal action, other states schedule
drugs through rulemaking or a legislative action. State scheduling
may delay commercial sale of any product for which we obtain
federal regulatory approval and adverse scheduling could have a
material adverse effect on the commercial attractiveness of such
product. We or our partners or clinical sites must also obtain
separate state registrations, permits or licenses in order to be
able to obtain, handle, and distribute controlled substances for
clinical trials or commercial sale, and failure to meet applicable
regulatory requirements could lead to enforcement and sanctions by
the states in addition to those from the DEA or otherwise arising
under federal law.
To conduct clinical
trials with our product candidates in the United States prior to
approval, each of our research sites must obtain and maintain a DEA
researcher registration that will allow those sites to handle and
dispense the product candidate and to obtain the product. If the
DEA delays or denies the grant of a research registration to one or
more research sites, the clinical trial could be significantly
delayed, and we could lose clinical trial sites.
Manufacturing of our
product candidates is, and, if approved, our commercial products
will be, subject to the DEA’s annual manufacturing and procurement
quota requirements, if classified as Schedule II. The annual quota
allocated to us or our contract manufacturers for the controlled
substances in our product candidates may not be sufficient to meet
commercial demand or complete clinical trials. Consequently, any
delay or refusal by the DEA in establishing our, or our contract
manufacturers’, procurement and/or production quota for controlled
substances could delay or stop our clinical trials or product
launches, which could have a material adverse effect on our
business, financial position and operations.
If, upon approval of any
of our product candidates, the product is scheduled as Schedule II
or III, we would also need to identify wholesale distributors with
the appropriate DEA registrations and authority to distribute the
product to pharmacies and other health care providers. The failure
to obtain, or delay in obtaining, or the loss any of those
registrations could result in increased costs to us. Furthermore,
state and federal enforcement actions, regulatory requirements, and
legislation intended to reduce prescription drug abuse, such as the
requirement that physicians consult a state prescription drug
monitoring program may make physicians less willing to prescribe,
and pharmacies to dispense, our products, if approved.
Our ability to
research, develop and commercialize our drug product candidates is
dependent on our ability to obtain and maintain the necessary
controlled substance registrations from the DEA.
In the United States,
the DEA regulates activities relating to the cultivation,
possession and supply of cannabis for medical research and/or
commercial development, including the requirement to obtain annual
registrations to manufacture or distribute pharmaceutical products
derived from cannabis extracts. The NIDA also plays a role in
oversight of the cultivation of cannabis for medicinal research. We
do not currently handle any controlled substances, but we plan to
partner with third-parties to engage in the research and
development of cannabis-derived compounds for medical purposes.
This will require that our third-party contractors obtain and
maintain the necessary DEA registrations, and be subject to other
regulatory requirements. The Company plans to develop and
manufacture synthetically produced active drug product and in
February 2016, July 2018 and April 2019, signed agreements with
Albany Molecular Research Inc (“AMRI”) to synthetically manufacture
our API to be used in our development programs for glaucoma and
CINV. In August 2019, the Company terminated its ongoing agreements
with AMRI. The Company entered into an agreement with Noramco, Inc.
(“Noramco”) in February 2019 to develop scale-up synthesis methods
and to manufacture the analog derivative, CBD-valine-hemisuccinate
(“CBDVHS”) and amended the agreement in August 2019 to include
tetrahydrocannabinol-valine-hemisuccinate (“THCVHS”).
The cultivation of
cannabis is strictly regulated in the United States under a complex
legal framework and our partners may be unable to obtain or
maintain the necessary authorizations to cultivate cannabis for the
research and development of cannabis-derived compounds.
We are partnering with
UM to research and develop cannabis-derived drug products. Pursuant
to that partnership, UM plans to cultivate cannabis and make
extracts to conduct or enable our third-party laboratories to
conduct early investigations into proof-of-concept studies on the
activity of these cannabinoids in various medical conditions. The
regulation of cannabis is complex and subject to stringent
controls. UM has indicated that its plan for cultivating cannabis
for the purification of cannabis extracts is in compliance with
applicable law, including the CSA, DEA regulations, and the United
States’ obligations under the 1961 Single Convention on Narcotic
Drugs. However, there is a risk that regulatory authorities may
disagree or may decline to authorize UM to engage in the
contemplated activities under the partnership. Interpretations of
law that DEA adopted in the past may evolve or change. If UM cannot
obtain or maintain the necessary regulatory authorizations that we
anticipate will be required for the contemplated development
program, our business may suffer and we may not be able to pursue
the discovery, research and development of cannabinoids.
Risks Related to
Government Regulation
If we fail to
demonstrate the safety and efficacy of any product candidate that
we develop to the satisfaction of the FDA or comparable foreign
regulatory authorities we may incur additional costs or experience
delays in completing, or ultimately be unable to complete, the
development and commercialization of such product candidate. This
would adversely impact our ability to generate revenue, our
business and our results of operations.
We are not permitted to
commercialize, market, promote, or sell any product candidate in
the United States without obtaining marketing approval from the FDA
or in other countries without obtaining approvals from comparable
foreign regulatory authorities, such as the European Medicines
Agency (the “EMA”), and we may never receive such approvals. To
gain approval to market a drug product, we must complete extensive
preclinical development and clinical trials that demonstrate the
safety and efficacy of the product for the intended indication to
the satisfaction of the FDA or other regulatory authority.
We have not previously
submitted a new drug application (“NDA”) to the FDA, or similar
drug approval filings to comparable foreign authorities, for any
product candidate, and we cannot be certain that any of our product
candidates will be successful in clinical trials or receive
regulatory approval. Further, our product candidates may not
receive regulatory approval even if they are successful in clinical
trials. If we do not receive regulatory approval for our product
candidates, we may not be able to continue our operations. Even if
we successfully obtain regulatory approval to market our product
candidates, our revenue will be dependent, in part, upon the size
of the markets in the territories for which we gain regulatory
approval and have commercial rights.
The FDA or any foreign regulatory bodies
could delay, limit or deny approval of our product candidates for
many reasons, including:
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our inability to demonstrate
to the satisfaction of the FDA or the applicable foreign regulatory
body that the product candidate is safe and effective for the
requested indication;
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the FDA’s or the applicable
foreign regulatory agency’s disagreement with the interpretation of
data from preclinical studies or clinical trials;
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our inability to demonstrate
that the clinical and other benefits of the product candidate
outweigh any safety or other perceived risks;
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the FDA’s or the applicable
foreign regulatory agency’s requirement for additional preclinical
or clinical studies;
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the FDA’s or the applicable
foreign regulatory agency’s non-approval of the formulation,
labeling or the specifications of the product candidate;
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the FDA’s or the applicable
foreign regulatory agency’s failure to approve the manufacturing
processes or facilities of third-party manufacturers with which we
contract; or
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the potential for approval
policies or regulations of the FDA or the applicable foreign
regulatory agencies to significantly change in a manner rendering
our clinical data insufficient for approval.
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Even if we eventually
complete clinical testing and receive approval of a NDA or foreign
regulatory filing for a product candidate, the FDA or the
applicable foreign regulatory agency may grant approval contingent
on the performance of costly additional clinical trials which may
be required after approval. The FDA or the applicable foreign
regulatory agency also may approve the product candidate for a more
limited indication or a narrower patient population than we
originally requested, and the FDA, or applicable foreign regulatory
agency, may not approve the labeling that we believe is necessary
or desirable for the successful commercialization of the product.
Any delay in obtaining, or inability to obtain, applicable
regulatory approval would delay or prevent commercialization of the
product candidate and would materially adversely impact our
business and prospects.
Preclinical and
clinical drug development involves a lengthy and expensive process
with an uncertain outcome. We may incur additional costs or
experience delays in completing, or ultimately be unable to
complete, the development and commercialization of our product
candidates.
Clinical testing is
expensive and can take several years to complete, and its outcome
is inherently uncertain. Moreover, obtaining sufficient quantities
of product for clinical testing is subject to regulation by DEA
and, in some cases, NIDA. It is impossible to predict when or if
any of our product candidates will prove effective or safe in
humans or will receive regulatory approval. Before obtaining
marketing approval from regulatory authorities for the sale of any
product candidate, we must complete preclinical studies and then
conduct extensive clinical trials to demonstrate the safety and
efficacy of our product candidates in humans. A failure of one or
more clinical trials can occur at any stage of testing. The outcome
of preclinical testing and early clinical trials may not be
predictive of the success of later clinical trials, and interim
results of a clinical trial do not necessarily predict final
results. Moreover, preclinical and clinical data are often
susceptible to varying interpretations and analyses, and many
companies that have believed their product candidates performed
satisfactorily in preclinical studies and clinical trials have
nonetheless failed to obtain marketing approval of their products.
We may experience numerous unforeseen events during, or as a result
of, clinical trials that could delay or prevent our ability to
receive marketing approval or subsequently to commercialize our
product candidates, including:
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FDA, DEA or NIDA may not
authorize the use and distribution of sufficient quantities of
product for clinical testing;
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regulators or independent
institutional review boards (IRBs) may not authorize us or our
investigators to commence a clinical trial or conduct a clinical
trial at a prospective trial site;
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we may experience delays in
reaching, or fail to reach, agreement on acceptable clinical trial
contracts or clinical trial protocols with prospective trial
sites;
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clinical trials of our
product candidates may produce negative or inconclusive results,
and we may decide, or regulators may require us, to conduct
additional clinical trials or abandon product development
programs;
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the number of patients
required for clinical trials of our product candidates may be
larger than we anticipate, enrollment in these clinical trials may
be slower than we anticipate or participants may drop out of these
clinical trials at a higher rate than we anticipate;
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our third-party contractors
may fail to comply with regulatory requirements or meet their
contractual obligations to us in a timely manner, or at all;
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we may have to suspend or
terminate clinical trials of our product candidates for various
reasons, including a finding that the participants are being
exposed to unacceptable health risks;
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regulators or institutional
review boards may require that we or our investigators suspend or
terminate clinical research for various reasons, including
noncompliance with regulatory requirements or a finding that the
participants are being exposed to unacceptable health risks;
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the cost of clinical trials
of our product candidates may be greater than we anticipate;
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the supply or quality of our
product candidates or other materials necessary to conduct clinical
trials of our product candidates may be insufficient or inadequate;
and
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our product candidates may
have undesirable side effects or other unexpected characteristics,
causing us or our investigators, regulators or institutional review
boards to suspend or terminate the trials.
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If we are required to
conduct additional clinical trials or other testing of our product
candidates beyond those that we currently contemplate, if we are
unable to successfully complete clinical trials of our product
candidates or other testing, if the results of these trials or
tests are not positive or are only modestly positive or if there
are safety concerns, we may:
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be delayed in obtaining
marketing approval for our product candidates;
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not obtain marketing
approval at all;
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obtain approval for
indications or patient populations that are not as broad as
intended or desired;
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obtain approval with
labeling that includes significant use or distribution restrictions
or safety warnings;
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be subject to additional
post-marketing testing requirements; or
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have the product removed
from the market after obtaining marketing approval.
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Our product development
costs will also increase if we experience delays in testing or in
receiving marketing approvals. We do not know whether any of our
preclinical studies or clinical trials will begin as planned, will
need to be restructured or will be completed on schedule, or at
all. Significant preclinical study or clinical trial delays also
could allow our competitors to bring products to market before we
do and impair our ability to successfully commercialize our product
candidates and may harm our business and results of operations.
If we experience
delays or difficulties in the enrollment of patients in clinical
trials, our receipt of necessary regulatory approvals could be
delayed or prevented.
We may not be able to
initiate or continue clinical trials for our product candidates if
we are unable to locate and enroll a sufficient number of eligible
patients to participate in these trials as required by the FDA or
similar regulatory authorities outside the United States. Our pool
of suitable patients may be smaller for some of our product
candidates, which will impact our ability to enroll a sufficient
number of suitable patients. In addition, some of our competitors
have ongoing clinical trials for product candidates that treat the
same indications as our product candidates, and patients who would
otherwise be eligible for our clinical trials may instead enroll in
clinical trials of our competitors’ product candidates. Patient
enrollment is affected by other factors including:
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the severity of the disease
under investigation;
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the eligibility criteria for
the study in question;
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the perceived risks and
benefits of the product candidate under study;
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the efforts to facilitate
timely enrollment in clinical trials;
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the patient referral
practices of physicians;
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the ability to monitor
patients adequately during and after treatment; and
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the proximity and
availability of clinical trial sites for prospective patients.
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Our inability to enroll
a sufficient number of patients for our clinical trials would
result in significant delays and could require us to abandon one or
more clinical trials altogether. Enrollment delays in our clinical
trials may result in increased development costs for our product
candidates, which would cause the value of our company to decline
and limit our ability to obtain additional financing.
Our development
and commercialization strategy for THCVHS, including NB1111, may
depend, in part, on published scientific literature and the FDA’s
prior findings regarding the safety and efficacy of dronabinol,
based on data not developed by us, but upon which the FDA may rely
in reviewing our NDA.
The Hatch-Waxman Act
added Section 505(b)(2) to the Federal Food, Drug and Cosmetic Act
(“FDCA”), Section 505(b)(2) permits the filing of a NDA where at
least some of the information required for approval comes from
investigations that were not conducted by or for the applicant and
for which the applicant has not obtained a right of reference or
use from the person by or for whom the investigations were
conducted. The FDA interprets Section 505(b)(2) of the FDCA, for
purposes of approving a NDA, to permit the applicant to rely, in
part, upon published literature or the FDA’s previous findings of
safety and efficacy for an approved product. The FDA may also
require companies to perform additional clinical trials or
measurements to support any deviation from the previously approved
product. The FDA may then approve the new product candidate for all
or some of the label indications for which the referenced product
has been approved, as well as for any new indication sought by the
Section 505(b)(2) applicant. The label, however, may require all or
some of the limitations, contraindications, warnings or precautions
included in the listed product’s label, including a black box
warning, or may require additional limitations, contraindications,
warnings or precautions. Depending on guidance from the FDA, we may
decide to submit a NDA for NB1111 under Section 505(b)(2) relying,
in part, on the FDA’s previous findings of safety and efficacy from
investigations for the approved drug product Dronabinol for which
we have not received a right of reference and published scientific
literature. Even though we may be able to take advantage of Section
505(b)(2) to support potential U.S. approval, the FDA may require
us to perform additional clinical trials or measurements to support
approval. In addition, notwithstanding the approval of many
products by the FDA pursuant to Section 505(b)(2), over the last
few years some pharmaceutical companies and others have objected to
the FDA’s interpretation of Section 505(b)(2). If the FDA changes
its interpretation of Section 505(b)(2), or if the FDA’s
interpretation is successfully challenged in court, this could
delay or even prevent the FDA from approving any Section 505(b)(2)
NDAs that we submit. Such a result could require us to conduct
additional testing and costly clinical trials, which could
substantially delay or prevent the approval and launch of our
product candidates, including NB1111.
Even if we receive
regulatory approval for a product candidate, we will be subject to
ongoing regulatory obligations and continued regulatory review,
which may result in significant additional expense and subject us
to restrictions, withdrawal from the market, or penalties if we
fail to comply with applicable regulatory requirements or if we
experience unanticipated problems with our product candidates, when
and if approved.
Once regulatory approval
has been granted, the approved product and its manufacturer are
subject to continual review by the FDA, DEA and/or non-U.S.
regulatory authorities. Any regulatory approval that we receive for
our product candidates may be subject to limitations on the
indicated uses for which the product may be marketed or contain
requirements for potentially costly post-marketing follow-up
studies or surveillance to monitor the safety and efficacy of the
product. In addition, if the FDA and/or non-U.S. regulatory
authorities approve any of our product candidates, we will be
subject to extensive and ongoing regulatory requirements by the FDA
and other regulatory authorities with regard to labeling,
packaging, adverse event reporting, storage, distribution,
advertising, promotion, recordkeeping and submission of safety and
other post-market information. Manufacturers of our products and
manufacturers’ facilities are required to comply with current good
manufacturing practice (“cGMP”) regulations, which include
requirements related to quality control and quality assurance as
well as the corresponding maintenance of records and documentation.
Further, regulatory authorities must approve these manufacturing
facilities before they can be used to manufacture our products, and
these facilities are subject to continual review and periodic
inspections by the FDA and other regulatory authorities for
compliance with cGMP regulations. Accordingly, we and others with
whom we work must continue to expend time, money and effort in all
areas of regulatory compliance, including manufacturing, production
and quality control. We will also be required to report certain
adverse reactions and production problems, if any, to the FDA and
to comply with requirements concerning advertising and promotion
for our products. If we, any future collaboration partner or a
regulatory authority discovers previously unknown problems with a
product, such as adverse events of unanticipated severity or
frequency, or problems with the facility where the product is
manufactured, a regulatory authority may impose restrictions on
that product, the collaboration partner, the manufacturer or us,
including requiring withdrawal of the product from the market or
suspension of manufacturing.
Any DEA registrations
that we receive may also be subject to limitations. For example, if
approved, our commercial products will be subject to the DEA’s
annual manufacturing and procurement quota requirements. The annual
quota allocated to us or our contract manufacturers for the
controlled substances in our product candidates may not be
sufficient to meet commercial demand. Our facilities that handle
controlled substances, and those of our third-party contractors,
will also be subject to registration requirements and periodic
inspections. Additionally, if approved by the FDA, the finished
dosage forms of our drug product candidates will be subject to the
DEA’s rescheduling process, which may delay product launch and
impose additional regulatory burdens. Failure to maintain
compliance with the CSA, particularly non-compliance resulting in
loss or diversion, can result in regulatory action that could have
a material adverse effect on our business, financial condition and
results of operations. The DEA may seek civil penalties, refuse to
renew necessary registrations, or initiate proceedings to restrict,
suspend or revoke those registrations. In certain circumstances,
violations could lead to criminal proceedings. For additional
information, see Risk Factor, “The product candidates we are
developing will be subject to U.S. controlled substance laws and
regulations and failure to comply with these laws and regulations,
or the cost of compliance with these laws and regulations, may
adversely affect the results of our business operations, both
during non-clinical and clinical development and post-approval, and
our financial condition.”
The FDA closely
regulates the post-approval marketing and promotion of drugs to
ensure drugs are marketed only for the approved indications and in
accordance with the provisions of the approved labeling and
regulatory requirements. The FDA also imposes stringent
restrictions on manufacturers’ communications regarding off-label
use and if we do not restrict the marketing of our products only to
their approved indications, we may be subject to enforcement action
for off-label marketing. If we, our product candidates or the
manufacturing facilities for our product candidates fail to comply
with regulatory requirements of the FDA and/or other non-U.S.
regulatory authorities, we could be subject to administrative or
judicially imposed sanctions, including:
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warning letters or untitled
letters;
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mandated modifications to
promotional materials or the required provision of corrective
information to healthcare practitioners;
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restrictions imposed on the
product or its manufacturers or manufacturing processes;
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restrictions imposed on the
labeling or marketing of the product;
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restrictions imposed on
product distribution or use;
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requirements for
post-marketing clinical trials;
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suspension of any ongoing
clinical trials;
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suspension of or withdrawal
of regulatory approval;
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voluntary or mandatory
product recalls and publicity requirements;
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refusal to approve pending
applications for marketing approval of new products or supplements
to approved applications filed by us;
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restrictions on operations,
including costly new manufacturing requirements;
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seizure or detention of our
products;
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refusal to permit the import
or export of our products;
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required entry into a
consent decree, which can include imposition of various fines
(including restitution or disgorgement of profits or revenue),
reimbursements for inspection costs, required due dates for
specific actions and penalties for noncompliance;
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civil or criminal penalties;
or
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injunctions.
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Widely publicized events
concerning the safety risk of certain drug products have resulted
in the withdrawal of drug products, revisions to drug labeling that
further limit use of the drug products and the imposition by the
FDA of risk evaluation and mitigation strategies (“REMS”), to
ensure that the benefits of the drug outweigh its risks. In
addition, widely publicized events concerning the safety risk of
certain drug products have resulted in the withdrawal of drug
products, revisions to drug labeling that further limit use of the
drug products and the imposition by the FDA of REMS to ensure that
the benefits of the drug outweigh its risks. In addition, because
of the serious public health risks of high profile adverse safety
events with certain products, the FDA may require, as a condition
of approval, costly REMS programs.
The regulatory
requirements and policies may change, and additional government
regulations may be enacted for which we may also be required to
comply. For example, in December 2016, the 21st Century Cures Act
(“Cures Act”), was signed into law. The Cures Act, among other
things, is intended to modernize the regulation of drugs and spur
innovation, but its ultimate implementation is unclear. If we are
slow or unable to adapt to changes in existing requirements or the
adoption of new requirements or policies, or if we are not able to
maintain regulatory compliance, we may lose any marketing approval
that we may have obtained and we may not achieve or sustain
profitability, which would adversely affect our business,
prospects, financial condition and results of operations.
We cannot predict the
likelihood, nature or extent of government regulation that may
arise from future legislation or administrative action, either in
the United States or in other countries. For example, certain
regulatory policies of the Trump administration may impact our
business and industry in ways that are difficult or impossible to
predict. Since the November 2016 U.S. presidential election, the
Trump administration has made numerous efforts to reduce regulation
and its associated costs, including the issuance of a number of
Executive Orders which could impose significant burdens on, or
otherwise materially delay, the FDA’s ability to engage in routine
regulatory and oversight activities such as implementing statutes
through rulemaking, issuance of guidance, and review and approval
of marketing applications. In January 2017, President Trump issued
Executive Order 13771, applicable to all executive agencies,
including the FDA, which requires an agency to repeal two existing
rules for each new significant rule or guidance document to be
issued, unless otherwise prohibited by law. This “two-for-one”
policy is aimed at reducing regulatory costs. For fiscal years 2018
and beyond, this Executive Order requires agencies to identify
regulations to offset any incremental cost of a new regulation and
approximate the total costs or savings associated with each new
regulation or repealed regulation. It is difficult to predict the
extent to which such regulatory reform initiatives and actions will
impact the FDA’s ability to exercise its regulatory authority. If
these executive actions impose constraints on the FDA’s ability to
engage in oversight and implementation activities in the normal
course, our business may be negatively impacted. If we or any
future collaboration partner are not able to maintain regulatory
compliance, we or such collaboration partner, as applicable, will
not be permitted to market our future products and our business
will suffer.
Serious adverse
events or undesirable side effects or other unexpected properties
of any of our product candidates may be identified during
development or after approval that could delay, prevent or cause
the withdrawal of regulatory approval, limit the commercial
potential, or result in significant negative consequences following
marketing approval.
Serious adverse events
or undesirable side effects caused by, or other unexpected
properties of, our product candidates could cause us, an IRB, or
regulatory authorities to interrupt, delay or halt our clinical
trials and could result in a more restrictive label, the imposition
of distribution or use restrictions or the delay or denial of
regulatory approval by the FDA or comparable foreign regulatory
authorities. If any of our product candidates are associated with
serious adverse events or undesirable side effects or have
properties that are unexpected, we may need to abandon their
development or limit development to certain uses or subpopulations
in which the undesirable side effects or other characteristics are
less prevalent, less severe or more acceptable from a risk-benefit
perspective. Many compounds that initially showed promise in
clinical or earlier stage testing have later been found to cause
undesirable or unexpected side effects that prevented further
development of the compound.
Undesirable side effects
or other unexpected adverse events or properties of any of our
other product candidates could arise or become known either during
clinical development or, if approved, after the approved product
has been marketed. If such an event occurs during development, our
trials could be suspended or terminated and the FDA or comparable
foreign regulatory authorities could order us to cease further
development of, or deny approval of, our product candidates. If
such an event occurs after such product candidates are approved, a
number of potentially significant negative consequences may result,
including:
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regulatory authorities may
withdraw the approval of such product;
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regulatory authorities may
require additional warnings on the label or impose distribution or
use restrictions;
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regulatory authorities may
require one or more post-market studies;
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we may be required to create
a medication guide outlining the risks of such side effects for
distribution to patients;
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we could be sued and held
liable for harm caused to patients; and
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our reputation may
suffer.
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Any of these events
could prevent us from achieving or maintaining market acceptance of
the affected product candidate, if approved, or could substantially
increase commercialization costs and expenses, which could delay or
prevent us from generating revenue from the sale of our products
and harm our business and results of operations.
We expect to rely
on third parties, such as CROs, to conduct some or all of our
preclinical and clinical trials. If these third parties do not
successfully carry out their contractual duties or meet expected
deadlines, we may be unable to obtain regulatory approval for or
commercialize any of our product candidates.
We expect to rely on
medical institutions, clinical investigators, contract laboratories
and other third parties, such as CROs, to conduct our preclinical
and clinical studies on our product candidates in compliance with
applicable regulatory requirements. These third parties will not be
our employees and, except for restrictions imposed by our contracts
with such third parties, we will have limited ability to control
the amount or timing of resources that they devote to our programs.
Although we expect to rely on these third parties to conduct our
preclinical studies and clinical trials, we will remain responsible
for ensuring that each of our preclinical studies and clinical
trials is conducted in accordance with its investigational plan and
protocol and the applicable legal, regulatory, and scientific
standards, and our reliance on these third parties will not relieve
us of our regulatory responsibilities. These entities must maintain
and comply with valid DEA registrations and requirements. The FDA
and regulatory authorities in other jurisdictions require us to
comply with regulations and standards, commonly referred to as
current good clinical practices (“cGCPs”), for conducting,
monitoring, recording and reporting the results of clinical trials,
in order to ensure that the data and results are scientifically
credible and accurate and that the trial subjects are adequately
informed of the potential risks of participating in clinical
trials. If we or any of our third-party contractors fail to comply
with applicable cGCPs, the clinical data generated in our clinical
trials may be deemed unreliable and the FDA or comparable foreign
regulatory authorities may require us to perform additional
clinical trials before approving our marketing applications. In
addition, we are required to report certain financial interests of
our third-party investigators if these relationships exceed certain
financial thresholds and meet other criteria. The FDA or comparable
foreign regulatory authorities may question the integrity of the
data from those clinical trials conducted by principal
investigators who previously served or currently serve as
scientific advisors or consultants to us from time to time and
receive cash compensation in connection with such services. Our
clinical trials must also generally be conducted with products
produced under cGMP regulations. Our failure to comply with these
regulations may require us to repeat clinical trials, which would
delay the regulatory approval process.
Some of the third
parties with whom we contract may also have relationships with
other commercial entities, some of which may compete with us. If
the third parties conducting our preclinical studies or our
clinical trials do not perform their contractual duties or
obligations or comply with regulatory requirements, we may need to
enter into new arrangements with alternative third parties. This
could be costly, and our preclinical studies or clinical trials may
need to be extended, delayed, terminated or repeated, and we may
not be able to obtain regulatory approval in a timely fashion, or
at all, for the applicable product candidate, or to commercialize
such product candidate being tested in such studies or trials. If
any of our relationships with these third parties terminate, we may
not be able to enter into arrangements with alternative third-party
contractors or to do so on commercially reasonable terms. Though we
plan to carefully manage our relationships with our CROs, there can
be no assurance that we will not encounter similar challenges or
delays in the future or that these delays or challenges will not
have a material adverse impact on our business, financial condition
and prospects.
We rely on, and
expect to continue relying on, third-party contract manufacturing
organizations to manufacture and supply product candidates for us,
as well as certain raw materials used in the production thereof. If
one of our suppliers or manufacturers fails to perform adequately,
we may be required to incur significant delays and costs to find
new suppliers or manufacturers.
We currently have no
experience in, and we do not own facilities for, manufacturing our
product candidates. We rely on, and expect to continue relying
upon, third-party manufacturing organizations to manufacture and
supply our product candidates and certain raw materials used in the
production thereof. Some of our key components for the production
of our product candidates may have a limited number of
suppliers.
The facilities used by
our contract manufacturers to manufacture our product candidates
must be approved by the FDA pursuant to inspections that will be
conducted after we submit our NDA to the FDA. We expect that we
will not control the manufacturing process of, and will be
completely dependent on, our contract manufacturing partners for
compliance with cGMP requirements, for manufacture of our drug
products. If our contract manufacturers cannot successfully
manufacture material that conforms to our specifications and the
strict regulatory requirements of the FDA, DEA or others, they will
not be able to secure and/or maintain DEA registrations and
regulatory approval for their manufacturing facilities. In
addition, we expect that we will have no control over the ability
of our contract manufacturers to maintain adequate quality control,
quality assurance and qualified personnel. If the FDA or a
comparable foreign regulatory authority does not approve these
facilities for the manufacture of our product candidates, or if DEA
does not register these facilities for the manufacture of
controlled substances, we may need to find alternative
manufacturing facilities, which would significantly impact our
ability to develop, obtain regulatory approval for or market our
product candidates, if approved.
We do not have
commercial supply agreements with our suppliers. In the event that
we and our suppliers cannot agree to the terms and conditions for
them to provide clinical and commercial supply needs, we would not
be able to manufacture our product or candidates until a qualified
alternative supplier is identified, which could also delay the
development of, and impair our ability to commercialize, our
product candidates.
The failure of
third-party manufacturers or suppliers to perform adequately or the
termination of our arrangements with any of them may adversely
affect our business.
We could be
subject to costly product liability claims related to our clinical
trials and product candidates.
Because we plan to
conduct clinical trials with human subjects, we face the risk that
the use of our product candidates may result in adverse side
effects to our patients in our clinical trials. We face even
greater risks upon any commercialization of our product candidates.
An individual may bring a product liability claim against us
alleging that one of our product candidates causes, or is claimed
to have caused, an injury or is found to be unsuitable for consumer
use. Any product liability claim brought against us, with or
without merit, could result in:
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withdrawal of clinical trial
volunteers, investigators, patients or trial sites;
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the inability to
commercialize our product candidates;
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decreased demand for our
product candidates;
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regulatory investigations
that could require costly recalls or product modifications;
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loss of revenue;
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substantial costs of
litigation;
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liabilities that
substantially exceed our product liability insurance, which we
would then be required to pay ourselves;
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an increase in our product
liability insurance rates or the inability to maintain insurance
coverage in the future on acceptable terms, if at all;
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the diversion of
management’s attention from our business; and
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damage to our reputation and
the reputation of our products.
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Product liability claims
may subject us to the foregoing and other risks, which could have a
material adverse effect on our business, results of operations,
financial condition, and prospects.
Our employees,
independent contractors, principal investigators, CROs, consultants
and vendors may engage in misconduct or other improper activities,
including noncompliance with regulatory standards and
requirements.
We are exposed to the
risk that our employees, independent contractors, principal
investigators, CROs, consultants and vendors may engage in
fraudulent or other illegal activity. Misconduct by these parties
could include intentional, reckless and/or negligent conduct or
disclosure of unauthorized activities to us that violates: (1) FDA
regulations, including those laws requiring the reporting of true,
complete and accurate information to the FDA; (2) manufacturing
standards; (3) federal and state healthcare fraud and abuse laws
and regulations; or (4) laws that require the true, complete and
accurate reporting of financial information or data. Specifically,
sales, marketing and business arrangements in the healthcare
industry are subject to extensive laws and regulations intended to
prevent fraud, kickbacks, self-dealing and other abusive practices.
These laws and regulations may restrict or prohibit a wide range of
pricing, discounting, marketing and promotion, sales commission,
customer incentive programs and other business arrangements.
Activities subject to these laws also involve the improper use of
information obtained in the course of clinical trials, which could
result in regulatory sanctions and serious harm to our reputation.
It is not always possible to identify and deter misconduct by our
employees and other third parties, and the precautions we take to
detect and prevent this activity may not be effective in
controlling unknown or unmanaged risks or losses or in protecting
us from governmental investigations or other actions or lawsuits
stemming from a failure to be in compliance with such laws or
regulations. If any such actions are instituted against us, and we
are not successful in defending ourselves or asserting our rights,
those actions could have a significant impact on our business,
including the imposition of civil, criminal and administrative
penalties, damages, monetary fines, possible exclusion from
participation in Medicare, Medicaid and other federal healthcare
programs, contractual damages, reputational harm, diminished
profits and future earnings, and curtailment of our operations, any
of which could adversely affect our ability to operate our business
and our results of operations.
We are subject to
uncertainty relating to coverage and reimbursement policies which,
if not favorable to our product candidates, could hinder or prevent
our products’ commercial success.
Our ability to
commercialize our product candidates, if approved, successfully
will depend in part on the extent to which governmental
authorities, private health insurers and other third-party payors
establish appropriate coverage and reimbursement levels for our
product candidates. As a threshold for coverage and reimbursement,
third-party payors generally require that drug products have been
approved for marketing by the FDA. A primary trend in the U.S.
healthcare industry is cost containment. Third-party payors have
attempted to control costs by limiting coverage and the amount of
reimbursement for particular products and procedures. Increasingly,
third-party payors are requiring that companies provide them with
predetermined discounts from list prices and are challenging the
prices charged for medical products. We cannot assure you that
coverage and reimbursement will be available for any product that
we commercialize and, if coverage is available, what the level of
reimbursement will be. Coverage and reimbursement may impact the
demand for, or the price of, any product for which we obtain
marketing approval. If coverage and reimbursement are not available
or are available only to limited levels, we may not be able to
successfully commercialize any product candidate that we
successfully develop.
Healthcare reform
measures could hinder or prevent our products candidates’
commercial success, if approved.
In the United States,
there have been, and we anticipate there will continue to be, a
number of legislative and regulatory changes to the healthcare
system that could impact our ability to sell any of our products
profitably if approved. In the United States, the Federal
government passed the Patient Protection and Affordable Care Act in
2010, as amended by the Health Care and Education Reconciliation
Act (collectively, the “ACA”), which substantially changed the way
healthcare is financed by both governmental and private insurers.
The ACA contains a number of provisions, including those governing
enrollment in federal healthcare programs, reimbursement changes
and fraud and abuse, which impact existing government healthcare
programs and will result in the development of new programs,
including Medicare payment for performance initiatives and
improvements to the physician quality reporting system and feedback
program. Additionally, the ACA:
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increases the minimum level
of Medicaid rebates payable by manufacturers of brand-name drugs
from 15.1% to 23.1%;
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requires collection of
rebates for drugs paid by Medicaid managed care organizations;
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requires manufacturers to
participate in a coverage gap discount program, under which they
must agree to offer 50 percent point-of-sale discounts off
negotiated prices of applicable brand drugs to eligible
beneficiaries during their coverage gap period, as a condition for
the manufacturer’s outpatient drugs to be covered under Medicare
Part D; and
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imposes a non-deductible
annual fee on pharmaceutical manufacturers or importers who sell
“branded prescription drugs” to specified federal government
programs.
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The Trump administration
and the U.S. Congress have made numerous efforts to modify, repeal,
or otherwise invalidate all, or certain provisions of, the ACA. In
May 2017, the U.S. House of Representatives voted to pass the
American Health Care Act (the “AHCA”), which would repeal numerous
provisions of the ACA. The U.S. Senate considered, but did not vote
to pass, the AHCA, leaving the ACA largely in place. The Tax Cuts
and Jobs Act signed into law in December 2017 repealed the ACA’s
individual health insurance mandate, which is considered a
significant component of the ACA. Uncertainty remains with respect
to the impact the Trump administration and the U.S. Congress may
have, if any, on the future stability of the ACA and its resulting
impact on our business. We expect efforts to modify or repeal the
ACA to continue, and the potential impact of such efforts are
unclear. Any future changes will likely take time to unfold and
could have a significant impact on coverage and reimbursement for
healthcare items and services covered by plans that were authorized
by the ACA. Increasing emphasis on managed care in the U.S. will
continue to put downward pressure on the pricing of products, and
cost-control initiatives could have the effect of decreasing the
price that we or any of our collaborators may receive for our
future products. We expect that the ACA and other healthcare reform
initiatives adopted in the future may result in more rigorous
coverage criteria and additional downward pressure on the price we
may receive for any approved product. We cannot predict with
certainty the effect the ACA or other healthcare reform initiatives
that may be adopted in the future will have on our business. Our
results of operations may be adversely affected by the ACA, changes
to the ACA, and by other healthcare reform initiatives adopted in
the future.
In addition to the ACA,
other legislative changes have been proposed and adopted since the
ACA was enacted. On August 2, 2011, the Budget Control Act of 2011
was signed into law, which, among other things, created the Joint
Select Committee on Deficit Reduction to recommend to Congress
proposals in spending reductions. The Joint Select Committee did
not achieve a targeted deficit reduction of at least $1.2 trillion
for the years 2013 through 2021, triggering the legislation’s
automatic reduction to several government programs. This includes
reductions to Medicare payments to providers of 2% per fiscal year,
which went into effect on April 1, 2013, and, due to subsequent
legislative amendments, will remain in effect through 2025 unless
Congressional action is taken. On January 2, 2013, the American
Taxpayer Relief Act of 2012 was signed into law, which, among other
things, further reduced Medicare payments to several providers,
including hospitals, and increased the statute of limitations
period for the government to recover overpayments to providers from
three to five years. In addition, there has been heightened
governmental scrutiny over the manner in which manufacturers set
prices for their marketed products, which has resulted in several
Congressional inquiries and proposed bills designed to, among other
things, reform government program reimbursement methodologies.
We expect that
additional state and federal healthcare reform measures will be
adopted in the future, any of which could limit the amounts that
federal and state governments will pay for healthcare products and
services, which could result in reduced demand for our product
candidates if approved, or additional pricing pressure. The
implementation of cost containment measures or other healthcare
reform initiatives may prevent us from being able to generate
revenue, attain profitability, or commercialize any products for
which we may obtain regulatory approval. The continuing efforts of
the government, insurance companies, managed care organizations and
other payors of healthcare services to make and implement
healthcare reforms may adversely affect:
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our ability to set a price
we believe is fair for our products;
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our ability to generate
revenues and achieve or maintain profitability;
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the availability of capital;
and
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our ability to obtain timely
approval of our products.
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We may be subject,
directly or indirectly, to federal and state healthcare fraud and
abuse laws, false claims laws, and health information privacy and
security laws. If we are unable to comply, or have not fully
complied, with such laws, we could face substantial
penalties.
If we obtain FDA
approval for any of our product candidates and begin
commercializing those products in the United States, our operations
may be directly, or indirectly through our customers, subject to
various federal and state fraud and abuse laws, including, without
limitation, the federal Anti-Kickback Statute, the federal False
Claims Act, and physician sunshine laws and regulations. These laws
may impact, among other things, our proposed sales, marketing, and
education programs. In addition, we may be subject to patient
privacy regulation by both the federal government and the states in
which we conduct our business. The laws that may affect our ability
to operate include:
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the federal Anti-Kickback
Statute, which prohibits, among other things, persons from
knowingly and willfully soliciting, receiving, offering or paying
remuneration, directly or indirectly, to induce, or in return for,
the purchase or recommendation of an item or service reimbursable
under a federal healthcare program, such as the Medicare and
Medicaid programs;
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federal civil and criminal
false claims laws and civil monetary penalty laws, which prohibit,
among other things, individuals or entities from knowingly
presenting, or causing to be presented, claims for payment from
Medicare, Medicaid, or other third-party payors that are false or
fraudulent;
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the federal Health Insurance
Portability and Accountability Act of 1996 (“HIPAA”), which created
federal criminal statutes that prohibit executing a scheme to
defraud any healthcare benefit program and making false statements
relating to healthcare matters;
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HIPAA, as amended by the
Health Information Technology and Clinical Health Act and its
implementing regulations, which imposes certain requirements
relating to the privacy, security, and transmission of individually
identifiable health information;
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the federal physician
sunshine requirements under the ACA, which require manufacturers of
drugs, devices, biologics, and medical supplies to report annually
to the U.S. Department of Health and Human Services information
related to payments and other transfers of value to physicians,
other healthcare providers, and teaching hospitals, and ownership
and investment interests held by physicians and other healthcare
providers and their immediate family members; and
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state law equivalents of
each of the above federal laws, such as anti-kickback and false
claims laws that may apply to items or services reimbursed by any
third-party payor, including commercial insurers; state laws that
require pharmaceutical companies to comply with the pharmaceutical
industry’s voluntary compliance guidelines and the relevant
compliance guidance promulgated by the federal government, or
otherwise restrict payments that may be made to healthcare
providers and other potential referral sources; state laws that
require drug manufacturers to report information related to
payments and other transfers of value to physicians and other
healthcare providers or marketing expenditures, and state laws
governing the privacy and security of health information in certain
circumstances, many of which differ from each other in significant
ways and may not have the same effect, thus complicating compliance
efforts.
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Because of the breadth
of these laws and the narrowness of the statutory exceptions and
safe harbors available, it is possible that some of our business
activities could be subject to challenge under one or more of such
laws. In addition, recent health care reform legislation has
strengthened these laws. For example, the ACA, among other things,
amends the intent requirement of the federal Anti-Kickback and
criminal healthcare fraud statutes. A person or entity no longer
needs to have actual knowledge of this statute or specific intent
to violate it. Moreover, the ACA provides that the government may
assert that a claim including items or services resulting from a
violation of the federal Anti-Kickback Statute constitutes a false
or fraudulent claim for purposes of the False Claims Act.
If our operations are
found to be in violation of any of the laws described above or any
other governmental regulations that apply to us, we may be subject
to penalties, including civil and criminal penalties, damages,
fines, exclusion from participation in government health care
programs, such as Medicare and Medicaid, imprisonment, and the
curtailment or restructuring of our operations, any of which could
adversely affect our ability to operate our business and our
results of operations.
We may be subject
to requests for access to our product candidates. Demand for
compassionate use of our unapproved therapies could strain our
resources, delay our drug development activities, negatively impact
our regulatory approval or commercial activities, and result in
losses.
We are developing
product candidates to treat life-threatening illnesses for which
there are currently limited therapeutic options. If we experience
requests for access to unapproved drugs, we may experience
significant disruption to our business which could result in
losses. We are a small company with limited resources, and any
unanticipated trials or access programs resulting from requests for
access could deplete our drug supply, increase our capital
expenditures, and otherwise divert our resources from our primary
goals.
In addition, legislation
referred to as “Right to Try” laws have been introduced at the
local and national levels, which are intended to give patients
access to unapproved therapies. New and emerging legislation
regarding expanded access to unapproved drugs for life-threatening
illnesses could negatively impact our business in the future.
Either activism or legislation related to requests for access may
require us to initiate an unanticipated expanded access program or
to make our product candidates more widely available sooner than
anticipated.
Patients who receive
access to unapproved drugs through compassionate use or expanded
access programs have life-threatening illnesses and generally have
exhausted all other available therapies. The risk for serious
adverse events, including those which may be unrelated to our
product candidates, in this patient population is high and could
have a negative impact on the safety profile of our product
candidate, which could cause significant delays or an inability to
successfully commercialize our product candidate and could
materially harm our business. In addition, in order to perform the
controlled clinical trials required for regulatory approval and
successful commercialization of our product candidates, we may also
need to restructure or pause any ongoing compassionate use and/or
expanded access programs, which could prompt adverse publicity or
other disruptions related to current or potential participants in
such programs.
Risks Related to our
Common Stock:
We are subject to
the reporting requirements of federal securities laws, which is
expensive.
We are a public
reporting company in the United States and, accordingly, subject to
the information and reporting requirements of the Exchange Act and
other federal securities laws, and the compliance obligations of
the Sarbanes-Oxley Act. The costs of preparing and filing annual
and quarterly reports, proxy statements and other information with
the SEC and furnishing audited reports to stockholders causes our
expenses to be higher than they would be if we remained a
privately-held company.
Our compliance
with the Sarbanes-Oxley Act and SEC rules concerning internal
controls is time consuming, difficult and costly.
We are a reporting
company with the SEC and therefore must comply with Sarbanes-Oxley
Act and SEC rules concerning internal controls. It is time
consuming, difficult and costly for us to develop and implement the
internal controls and reporting procedures required by the
Sarbanes-Oxley Act. In order to expand our operations, we will need
to hire additional financial reporting, internal control, and other
finance staff in order to develop and implement appropriate
internal controls and reporting procedures.
Our stock price
may be volatile, which may result in losses to our
stockholders.
The stock markets have
experienced significant price and trading volume fluctuations, and
the market prices of companies quoted on the OTCQB, where our
shares of common stock will be quoted, generally have been very
volatile and have experienced sharp share-price and trading-volume
changes. The trading price of our common stock is likely to be
volatile and could fluctuate widely in response to many of the
following factors, some of which are beyond our control:
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variations in our operating
results;
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changes in expectations of
our future financial performance, including financial estimates by
securities analysts and investors;
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changes in operating and
stock price performance of other companies in our industry;
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additions or departures of
key personnel; and
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future sales of our common
stock.
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Domestic and
international stock markets often experience significant price and
volume fluctuations. These fluctuations, as well as general
economic and political conditions unrelated to our performance, may
adversely affect the price of our common stock. In particular,
following initial public offerings, the market prices for stocks of
companies often reach levels that bear no established relationship
to the operating performance of these companies. These market
prices are generally not sustainable and could vary widely. In the
past, following periods of volatility in the market price of a
public company’s securities, securities class action litigation has
often been initiated.
Our common shares
are thinly-traded, and in the future, may continue to be
thinly-traded, and you may be unable to sell at or near ask prices
or at all if you need to sell your shares to raise money or
otherwise desire to liquidate such shares.
We cannot predict the
extent to which an active public market for our common stock will
develop or be sustained due to a number of factors, including the
fact that we are a small company that is relatively unknown to
stock analysts, stock brokers, institutional investors, and others
in the investment community that generate or influence sales
volume, and that even if we came to the attention of such persons,
they tend to be risk-averse and would be reluctant to follow an
unproven company such as ours or purchase or recommend the purchase
of our shares until such time as we became more seasoned and
viable. As a consequence, there may be periods of several days or
more when trading activity in our shares is minimal or
non-existent, as compared to a seasoned issuer which has a large
and steady volume of trading activity that will generally support
continuous sales without an adverse effect on share price. We
cannot give you any assurance that a broader or more active public
trading market for our common stock will develop or be sustained,
or that current trading levels will be sustained.
The market price for our
common stock may be particularly volatile given our status as a
relatively small company and lack of revenues that could lead to
wide fluctuations in our share price. You may be unable to sell
your common stock at or above your purchase price if at all, which
may result in substantial losses to you.
The market for our
common shares may be characterized by significant price volatility
when compared to seasoned issuers, and we expect that our share
price will be more volatile than a seasoned issuer for the
indefinite future. The potential volatility in our share price is
attributable to a number of factors. First, as noted above, our
common shares may be sporadically and/or thinly traded. As a
consequence of this lack of liquidity, the trading of relatively
small quantities of shares by our stockholders may
disproportionately influence the price of those shares in either
direction. The price for our shares could, for example, decline
precipitously in the event that a large number of our common shares
are sold on the market without commensurate demand, as compared to
a seasoned issuer that could better absorb those sales without
adverse impact on its share price. Secondly, an investment in us is
a speculative or “risky” investment due to our lack of revenues or
profits to date. As a consequence of this enhanced risk, more
risk-adverse investors may, under the fear of losing all or most of
their investment in the event of negative news or lack of progress,
be more inclined to sell their shares on the market more quickly
and at greater discounts than would be the case with the stock of a
seasoned issuer.
Because we became
public by means of a “reverse merger,” we may not be able to
attract the attention of major brokerage firm or investors in
general.
Additional risks may
exist because we became a public company through a “reverse
merger.” Securities analysts of major brokerage firms may not
provide coverage of us since there is little incentive to brokerage
firms to recommend the purchase of our common stock. No assurance
can be given that brokerage firms will want to conduct any
secondary offerings on behalf of our company in the future. In
addition, the SEC has recently issued an investor bulletin warning
investors about the risks of investing in companies that enter the
U.S. capital markets through a “reverse merger.” The release of
such information from the SEC may have the effect of reducing
investor interest in companies, such as us, that enter the U.S.
capital markets through a “reverse merger.”
We cannot assure
you that our common stock will become eligible for listing or
quotation on any exchange and the failure to do so may adversely
affect your ability to dispose of our common stock in a timely
fashion.
In order for our common
stock to become eligible for listing or quotation on any exchange,
reverse merger companies must have had their securities traded on
an over-the-counter market for at least one year, maintained a
certain minimum closing price for not less than 30 of the most
recent 60 days prior to the filing of an initial listing
application and prior to listing, and timely filed with the SEC all
required reports since consummation of the reverse merger,
including one annual report containing audited consolidated
financial statements for a full fiscal year commencing after the
date of filing of the Current Report on Form 8-K which discloses
the reverse merger. We may not be able to meet all of the filing
requirements above and may not be able to satisfy the initial
standards for listing or quotation on any exchange in the
foreseeable future or at all. Even if we are able to become listed
or quoted on an exchange, we may not be able to maintain a listing
of the common stock on such stock exchange.
We do not
anticipate paying any cash dividends.
We presently do not
anticipate that we will pay any dividends on any of our capital
stock in the foreseeable future. The payment of dividends, if any,
would be contingent upon our revenues and earnings, if any, capital
requirements, and general financial condition. The payment of any
dividends will be within the discretion of our Board of Directors
(the “Board”). We presently intend to retain all earnings, if any,
to implement our business plan; accordingly, we do not anticipate
the declaration of any dividends in the foreseeable future.
Our common stock
may be subject to penny stock rules, which may make it more
difficult for our stockholders to sell their common
stock.
Broker-dealer practices
in connection with transactions in “penny stocks” are regulated by
certain penny stock rules adopted by the SEC. Penny stocks
generally are equity securities with a price of less than $5.00 per
share. The penny stock rules require a broker-dealer, prior to a
purchase or sale of a penny stock not otherwise exempt from the
rules, to deliver to the customer a standardized risk disclosure
document that provides information about penny stocks and the risks
in the penny stock market. The broker-dealer also must provide the
customer with current bid and offer quotations for the penny stock,
the compensation of the broker-dealer and its salesperson in the
transaction, and monthly account statements showing the market
value of each penny stock held in the customer’s account. In
addition, the penny stock rules generally require that prior to a
transaction in a penny stock the broker-dealer make a special
written determination that the penny stock is a suitable investment
for the purchaser and receive the purchaser’s written agreement to
the transaction. These disclosure requirements may have the effect
of reducing the level of trading activity in the secondary market
for a stock that becomes subject to the penny stock rules.
Volatility in our
common stock price may subject us to securities
litigation.
The market for our
common stock is characterized by significant price volatility when
compared to seasoned issuers, and we expect that our share price
will continue to be more volatile than a seasoned issuer for the
indefinite future. In the past, plaintiffs have often initiated
securities class action litigation against a company following
periods of volatility in the market price of its securities. We
may, in the future, be the target of similar litigation. Securities
litigation could result in substantial costs and liabilities and
could divert management’s attention and resources.
We may need
additional capital, and the sale of additional shares or other
equity securities could result in additional dilution to our
stockholders.
We expect our existing
cash will be sufficient to fund our capital requirements for at
least the next month. We require additional capital for the
development and commercialization of our product candidates and may
require additional cash resources due to changed business
conditions or other future developments, including any investments
or acquisitions we may decide to pursue. If our resources are
insufficient to satisfy our cash requirements, we will seek to sell
additional equity or debt securities or obtain a credit facility.
The sale of additional equity securities could result in additional
dilution to our stockholders. The incurrence of additional
indebtedness would result in increased debt service obligations and
could result in operating and financing covenants that would
restrict our operations. We cannot assure you that financing will
be available in amounts or on terms acceptable to us, if at
all.
Our principal
stockholders and management own a significant percentage of our
stock and will be able to exert significant control over matters
subject to stockholder approval.
Certain of our executive officers, directors
and large stockholders own a significant percentage of our
outstanding capital stock. As of February 6, 2020, our executive
officers, directors, holders of 5% or more of our capital stock and
their respective affiliates owned approximately 63.4% of our
outstanding shares of common stock. As of Febraury 6, 2020, Emerald
Health Sciences, our majority stockholder, owned approximately
62.3% of our outstanding shares of common stock. Our Board is
controlled by the directors and principal executive officer of
Emerald Health Sciences. Accordingly, our directors and executive
officers have significant influence over our affairs due to their
substantial ownership coupled with their positions on our
management team and have substantial voting power to approve
matters requiring the approval of our stockholders. For example,
these stockholders may be able to control elections of directors,
amendments of our organizational documents, or approval of any
merger, sale of assets, or other major corporate transaction. This
concentration of ownership may prevent or discourage unsolicited
acquisition proposals or offers for our common stock that some of
our stockholders may believe is in their best interest.
We have a
substantial number of authorized common shares available for future
issuance that could cause dilution of our stockholders’ interest
and adversely impact the rights of holders of our common
stock.
We have a total of 500,000,000 shares of
common stock authorized for issuance and up to 20,000,000 shares of
preferred stock with the rights, preferences and privileges that
our Board may determine from time to time. As of February 6, 2020,
we have reserved 4,512,715 shares for issuance upon the exercise of
outstanding options, and 25,143,250 shares for issuance upon the
exercise of outstanding warrants. As of February 6, 2020, we had no
outstanding preferred stock. As of February 6, 2020, we had
317,104,753 shares of common stock available for issuance. We may
seek financing that could result in the issuance of additional
shares of our capital stock and/or rights to acquire additional
shares of our capital stock. We may also make acquisitions that
result in issuances of additional shares of our capital stock.
Those additional issuances of capital stock would result in a
significant reduction of your percentage interest in us.
Furthermore, the book value per share of our common stock may be
reduced. This reduction would occur if the exercise price of any
issued warrants, the conversion price of any convertible notes is
lower than the book value per share of our common stock at the time
of such exercise or conversion.
The addition of a
substantial number of shares of our common stock into the market or
by the registration of any of our other securities under the
Securities Act of 1933, as amended (the “Securities Act”), may
significantly and negatively affect the prevailing market price for
our common stock. The future sales of shares of our common stock
issuable upon the exercise of outstanding warrants may have a
depressive effect on the market price of our common stock, as such
warrants would be more likely to be exercised at a time when the
price of our common stock is greater than the exercise price.
There is not now,
and there may never be, an active, liquid and orderly trading
market for our common stock, which may make it difficult for you to
sell your shares of our common stock.
There is not now, nor
has there been since our inception, any significant trading
activity in our common stock or a market for shares of our common
stock, and an active trading market for our shares may never
develop or be sustained. As a result, investors in our common stock
must bear the economic risk of holding those shares for an
indefinite period of time. Although our common stock is quoted on
the OTCQB, an over-the-counter quotation system, trading of our
common stock is extremely limited and sporadic and at very low
volumes. We do not now, and may not in the future, meet the initial
listing standards of any national securities exchange. We presently
anticipate that our common stock will continue to be quoted on the
OTCQB or another over-the-counter quotation system in the
foreseeable future. In those venues, our stockholders may find it
difficult to obtain accurate quotations as to the market value of
their shares of our common stock and may find few buyers to
purchase their stock and few market makers to support its price. As
a result of these and other factors, you may be unable to resell
your shares of our common stock at or above the price for which you
purchased them, or at all. Further, an inactive market may also
impair our ability to raise capital by selling additional equity in
the future and may impair our ability to enter into strategic
partnerships or acquire companies or products by using our shares
of common stock as consideration.
If we are unable
to implement and maintain effective internal control over financial
reporting, investors may lose confidence in the accuracy and
completeness of our reported financial information and the market
price of our common stock may be negatively affected.
As a public company, we
are required to maintain internal control over financial reporting
and to report any material weaknesses in such internal control.
Section 404 of the Sarbanes-Oxley Act requires that we evaluate and
determine the effectiveness of our internal control over financial
reporting and provide a management report on the internal control
over financial reporting. If we have a material weakness in our
internal control over financial reporting, we may not detect errors
on a timely basis and our consolidated financial statements may be
materially misstated. We may not be able to complete our
evaluation, testing and any required remediation in a timely
fashion. During the evaluation and testing process, if we identify
one or more material weaknesses in our internal control over
financial reporting, our management will be unable to conclude that
our internal control over financial reporting is effective.
Moreover, when we are no longer a smaller reporting company, our
independent registered public accounting firm will be required to
issue an attestation report on the effectiveness of our internal
control over financial reporting. Even if our management concludes
that our internal control over financial reporting is effective,
our independent registered public accounting firm may conclude that
there are material weaknesses with respect to our internal controls
or the level at which our internal controls are documented,
designed, implemented or reviewed.
If we are unable to
conclude that our internal control over financial reporting is
effective, or when we are no longer a smaller reporting company, if
our auditors were to express an adverse opinion on the
effectiveness of our internal control over financial reporting
because we had one or more material weaknesses, investors could
lose confidence in the accuracy and completeness of our financial
disclosures, which could cause the price of our common stock to
decline. Internal control deficiencies could also result in a
restatement of our financial results in the future.
If securities or
industry analysts do not publish research or reports about our
business, or if they change their recommendations regarding our
stock adversely, our stock price and trading volume could
decline.
The trading market for
our common stock will be influenced by the research and reports
that industry or securities analysts publish about us or our
business. We do not currently have and may never obtain research
coverage by industry or financial analysts. If no or few analysts
commence coverage of us, the trading price of our stock would
likely decrease. Even if we do obtain analyst coverage, if one or
more of the analysts who cover us downgrade our stock, our stock
price would likely decline. If one or more of these analysts cease
coverage of our company or fail to regularly publish reports on us,
we could lose visibility in the financial markets, which in turn
could cause our stock price or trading volume to decline.
The issuance of
shares upon exercise of outstanding warrants and options may cause
immediate and substantial dilution to our existing
stockholders.
If the price per share of our common stock
at the time of exercise of any warrants, options, or any other
convertible securities is in excess of the various conversion or
exercise prices of these convertible securities, conversion or
exercise of these convertible securities would have a dilutive
effect on our common stock. As of February 6, 2020, we had
outstanding (i) warrants to purchase up to 25,143,250 shares of our
common stock at exercise prices ranging from $0.00 to $5.00 per
share, and (ii) options to purchase up to 4,512,715 shares of our
common stock at exercise prices ranging from $0.245 to $0.42 per
share. Further, any additional financing that we secure may require
the granting of rights, preferences or privileges senior to those
of our common stock and which result in additional dilution of the
existing ownership interests of our common stockholders.
Our ability to
utilize our net operating loss carryforwards and certain other tax
attributes may be limited.
Under Section 382 of the
Internal Revenue Code of 1986, as amended, if a corporation
undergoes an “ownership change,” the corporation’s ability to use
its pre-change net operating loss carryforwards and other
pre-change tax attributes to offset its post-change income may be
limited. In general, an “ownership change” occurs if the aggregate
stock ownership of one or more stockholders or groups of
stockholders who own at least 5% of a corporation’s stock increase
their ownership by more than 50 percentage points over their lowest
ownership percentage within a rolling three-year period. Similar
rules may apply under state tax laws. If it is determined that we
have in the past experienced any ownership changes, or if we
experience ownership changes as a result of future transactions in
our stock, our ability to use our net operating loss carryforwards
and other tax attributes to offset U.S. federal taxable income may
be subject to limitations, which could potentially result in
increased future tax liability to us.
FORWARD-LOOKING
STATEMENTS
Statements in this prospectus that are not descriptions of
historical facts are forward-looking statements that are based on
management’s current expectations and assumptions and are subject
to risks and uncertainties. If such risks or uncertainties
materialize or such assumptions prove incorrect, our business,
operating results, financial condition and stock price could be
materially negatively affected. In some cases, you can identify
forward-looking statements by terminology including “anticipates,”
“believes,” “can,” “continue,” “could,” “estimates,” “expects,”
“intends,” “may,” “plans,” “potential,” “predicts,” “should,”
“will,” “would” or the negative of these terms or other comparable
terminology. Factors that could cause actual results to differ
materially from those currently anticipated include those set forth
in the section titled “Risk Factors” including, without limitation,
risks relating to:
|
|
·
|
the results of our research
and development activities, including uncertainties relating to the
discovery of potential product candidates and the preclinical and
clinical testing of our product candidates;
|
|
|
·
|
the early stage of our
product candidates presently under development;
|
|
|
·
|
our need for substantial
additional funds in order to continue our operations, and the
uncertainty of whether we will be able to obtain the funding we
need;
|
|
|
·
|
our ability to obtain and,
if obtained, maintain regulatory approval of our current product
candidates, and any of our other future product candidates, and any
related restrictions, limitations, and/or warnings in the label of
any approved product candidate;
|
|
|
·
|
our ability to retain or
hire key scientific or management personnel;
|
|
|
·
|
our ability to protect our
intellectual property rights that are valuable to our business,
including patent and other intellectual property rights;
|
|
|
·
|
our dependence on UM,
third-party manufacturers, suppliers, research organizations,
testing laboratories and other potential collaborators;
|
|
|
·
|
our ability to develop
successful sales and marketing capabilities in the future as
needed;
|
|
|
·
|
the size and growth of the
potential markets for any of our approved product candidates, and
the rate and degree of market acceptance of any of our approved
product candidates;
|
|
|
·
|
competition in our industry;
and
|
|
|
·
|
regulatory developments in
the United States and foreign countries.
|
We operate in a
rapidly-changing environment and new risks emerge from time to
time. As a result, it is not possible for our management to predict
all risks, nor can we assess the impact of all factors on our
business or the extent to which any factor, or combination of
factors, may cause actual results to differ materially from those
contained in any forward-looking statements we may make. In light
of these risks, uncertainties and assumptions, the forward-looking
events and circumstances discussed in this prospectus may not occur
and actual results could differ materially and adversely from those
anticipated or implied in the forward-looking statements. You
should not rely upon forward-looking statements as predictions of
future events. Although we believe that the expectations reflected
in the forward-looking statements are reasonable, we cannot
guarantee that the future results, levels of activity, performance
or events and circumstances reflected in the forward-looking
statements will be achieved or occur. Moreover, neither we nor any
other person assumes responsibility for the accuracy and
completeness of the forward-looking statements. The forward-looking
statements included in this prospectus speak only as of the date
hereof, and except as required by law, we undertake no obligation
to update publicly any forward-looking statements for any reason
after the date of this prospectus to conform these statements to
actual results or to changes in our expectations.
USE OF PROCEEDS
We estimate that the net proceeds of this
offering will be approximately $4.3 million from the sale of our
units in this offering at the assumed public offering price of
$0.25 per unit, after deducting the estimated Placement Agent’s
fees and estimated offering expenses payable by us, assuming the
sale of all of the units being offered hereunder. The assumed
public offering price, and the resulting number of units offered
hereby as reflected in this prospectus, has been arbitrarily
determined and is approximately based on the last reported sale
price of our common stock on December 20, 2019. However, the final
public offering price will be a negotiated price and the final
number of units being offered hereby will be based on such
negotiated offering price. This amount excludes the proceeds, if
any, from the exercise of warrants in this offering. If all of the
warrants sold in this offering were to be exercised in cash at an
assumed exercise price of $0.35 per share, we would receive
additional net proceeds of approximately $7.0 million. However, the
final exercise price will be a negotiated price. We cannot predict
when or if these warrants will be exercised. It is possible that
these warrants may expire and may never be exercised. The table
below depicts how we plan to utilize the proceeds in the event that
25%, 50%, 75% and 100% of the units in this offering are sold,
after deducting estimated offering expenses payable by us.
|
Use of Proceeds
|
|
|
100 |
% |
|
|
75 |
% |
|
|
50 |
% |
|
|
25 |
% |
|
General corporate
purposes
|
|
$ |
4,312,100
|
|
|
$ |
3,168,350
|
|
|
$ |
2,024,600
|
|
|
$ |
880,850
|
|
|
Total:
|
|
$ |
4,312,100
|
|
|
$ |
3,168,350
|
|
|
$ |
2,024,600
|
|
|
$ |
880,850
|
|
We intend to use the net
proceeds from this offering for general corporate purposes,
including working capital. We may use the net proceeds from this
offering to fund possible acquisitions of other companies, products
or technologies, though no such acquisitions are currently
contemplated. In addition, a portion of the proceeds raised may be
used to pay, in whole or in part, the principal and/or the accrued
interest on our Credit Agreement. The terms of the Credit Agreement
are described in the section entitled “Certain Relationships and
Related Transactions and Director Independence.”
This expected use of our
net proceeds from this offering represents our intentions based
upon our current plans and business conditions, which could change
in the future as our plans and business conditions evolve. The
amounts and timing of our actual expenditures may vary
significantly depending on numerous factors, including the progress
of our drug candidate development, the status of and results from
clinical trials, as well as any collaborations that we may enter
into with third parties for our drug candidates, and any unforeseen
cash needs.
As a result, our
management will retain broad discretion over the allocation of the
net proceeds from this offering, and investors will be relying on
the judgment of our management regarding the application of the net
proceeds from this offering. The timing and amount of our actual
expenditures will be based on many factors, including cash flows
from operations and the anticipated growth of our business.
Any funds we raise in
this offering will be immediately available for our use and will
not be returned to investors. We will not maintain an escrow,
trust, or similar account for the receipt of proceeds from the sale
of our shares.
DIVIDEND POLICY
We have never declared
or paid any cash dividends on our capital stock. We currently
intend to retain all available funds and any future earnings for
use in the operation of our business and do not expect to pay any
dividends on our capital stock in the foreseeable future. Any
future determination to declare dividends will be made at the
discretion of our Board, subject to applicable laws, and will
depend on a number of factors, including our financial condition,
results of operations, capital requirements, contractual
restrictions, general business conditions, and other factors that
our Board may deem relevant.
DILUTION
If you purchase units in
this offering, your interest will be diluted to the extent of the
difference between the public offering price per unit and the net
tangible book value per share of our common stock after this
offering. Our net tangible book value (deficit) as of September 30,
2019 was $(16,402,461) or $(0.12) per share of common stock (based
upon 134,095,247 outstanding shares of common stock as of September
30, 2019). “Net tangible book value (deficit)” is total assets
minus the sum of liabilities and intangible assets. “Net tangible
book value (deficit) per share” is net tangible book value
(deficit) divided by the total number of shares of common stock
outstanding.
After giving effect to the sale by us in
this offering of approximately 20,000,000 units in this offering
(attributing no value to the warrants or proceeds from the sale of
warrants being offered) at an assumed public offering price of
$0.25 per unit, and after deducting the estimated Placement Agent’s
fees and estimated offering costs payable by us, our net tangible
book value (deficit) as of September 30, 2019 would have been
approximately $(12,090,361), or $(0.08) per share of common stock.
This amount represents an immediate increase in net tangible book
value of $0.04 per share to existing stockholders and an immediate
dilution of $(0.33) per share to purchasers in this offering.
The following table
illustrates the dilution:
|
Assumed public offering
price per share
|
|
|
|
|
$ |
0.25 |
|
|
Net tangible book value
(deficit) per share as of September 30, 2019
|
|
$ |
(0.12 |
) |
|
|
|
|
|
Increase in net tangible
book value per share attributable to this offering
|
|
$ |
0.04
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma, net tangible book
value (deficit) per share after this offering
|
|
|
|
|
|
$ |
(0.08
|
) |
|
Dilution per share to new
investors
|
|
|
|
|
|
$ |
0.33
|
|
The dilution information
set forth in the table above is illustrative only and will be
adjusted based on the actual public offering price and other terms
of this offering determined at pricing.
The above table is based
on 134,095,247 shares of common stock outstanding as of September
30, 2019 and, unless otherwise indicated, excludes:
|
|
·
|
4,512,715 shares of our
common stock issuable upon exercise of outstanding options at a
weighted average price of $0.304 per share;
|
|
|
|
|
|
·
|
57,943,250 shares of our
common stock issuable upon exercise of outstanding warrants with a
weighted-average exercise price of $0.241 per share;
|
|
|
|
|
|
·
|
15,000,000 shares of our
common stock underlying our Credit Agreement
|
|
|
|
|
|
·
|
8,248,381 shares of our
common stock that are reserved for equity awards that may be
granted under our equity incentive plans;
|
|
|
|
|
|
|
·
|
8,000,000 shares of our common stock and
shares of common stock issuable upon the exercise of 8,000,000
warrants, in each case, sold pursuant to a securities purchase
agreement as reported in the current report on the Form 8-K filed
with the SEC on November 21, 2019;
|
|
|
|
|
|
|
·
|
40,800,000 shares of our common stock issued
upon the exercise of 40,800,000 of warrants pursuant to the warrant
exercise agreement in exchange for a reduction of the outstanding
obligations in the amount of $4.08 million under the Credit
Agreement, as reported in the current report on the Form 8-K filed
with the SEC on December 23, 2019; and
|
|
|
|
|
|
·
|
any sales of pre-funded warrants, which, if
sold, would reduce the number of shares of common stock that we are
offering on a one-for-one basis, and shares of our common stock
issuable upon exercise of the warrants to be issued as part of the
units issued in this offering.
|
CAPITALIZATION
The
following table sets forth our cash and our capitalization as of
September 30, 2019 on:
|
|
·
|
an actual basis; and
|
|
|
|
|
|
·
|
an as adjusted basis giving effect to the
sale by us in this offering of 25%, 50%, 75% and 100% of the
20,000,000 units in this offering at an assumed public offering
price of $0.25 per unit, assuming no sales of pre-funded warrants,
which, if sold, would reduce the number of shares of common stock
that we are offering on a one-for-one basis, after deducting
estimated Placement Agent’s fees
and estimated offering expenses payable by
us.
|
The information set
forth in the table below is illustrative only and will be adjusted
based on the actual public offering price and other terms of this
offering determined at pricing. Cash is not a component of our
total capitalization. You should read these tables together with
the other information contained in this prospectus, including “Use
of Proceeds,” “Management’s Discussion and Analysis of Financial
Condition and Results of Operations” and the historical financial
statements and related notes thereto included elsewhere in this
prospectus.
As of September 30,
2019
|
|
As Adjusted
|
|
|
|
Actual
|
|
|
100% of
Maximum
|
|
|
75% of
Maximum
|
|
|
50% of
Maximum
|
|
|
25% of
Maximum
|
|
|
Cash
|
|
$
|
1,319,360
|
|
|
$
|
5,631,460
|
|
|
$
|
4,487,710
|
|
|
$
|
3,343,960
|
|
|
$
|
2,200,210
|
|
|
Convertible multi-draw
credit agreement, related party, net of discount (1)
|
|
|
3,296,249
|
|
|
|
3,296,249
|
|
|
|
3,296,249
|
|
|
|
3,296,249
|
|
|
|
3,296,249
|
|
|
Stockholders’ deficit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred Stock, $0.001 par value;
20,000,000 shares authorized; no shares issued and outstanding
actual or as adjusted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Common Stock, par value $0.001; 500,000,000
shares authorized; 134,095,247 shares issued and outstanding,
actual; 154,095,247 shares issued and outstanding as adjusted,
100%; 149,095,247 shares issued and outstanding as adjusted, 75%;
144,095,247 shares issued and outstanding as adjusted, 50%;
139,095,247 shares issued and outstanding as adjusted, 25%
|
|
|
134,095
|
|
|
|
154,095
|
|
|
|
149,095
|
|
|
|
144,095
|
|
|
|
139,095
|
|
|
Additional paid-in
capital
|
|
|
20,488,778
|
|
|
|
24,780,878
|
|
|
|
23,642,128
|
|
|
|
22,503,378
|
|
|
|
21,364,628
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated deficit
|
|
|
(37,025,334
|
)
|
|
|
(37,025,334
|
)
|
|
|
(37,025,334
|
)
|
|
|
(37,025,334
|
)
|
|
|
(37,025,334
|
)
|
|
Total stockholders’
deficit
|
|
|
(16,402,461
|
)
|
|
|
(12,090,361)
|
)
|
|
|
(13,324,111
|
)
|
|
|
(14,377,861
|
)
|
|
|
(15,521,611
|
)
|
|
Total capitalization
|
|
|
(13,106,212
|
)
|
|
|
(8,794,112)
|
|
|
|
(9,937,862
|
)
|
|
|
(11,081,612
|
)
|
|
|
(12,225,362
|
)
|
____________
|
(1)
|
The carrying value of the discount at
September 30, 2019 is $2,703,751.
|
The above table is based
on 134,095,247 shares of common stock outstanding as of September
30, 2019 and, unless otherwise indicated, excludes:
|
|
·
|
4,512,715 shares of our
common stock issuable upon exercise of outstanding options at a
weighted average price of $0.304 per share
|
|
|
|
|
|
·
|
57,943,250 shares of our common stock
issuable upon exercise of outstanding warrants with a
weighted-average exercise price of $0.241 per share;
|
|
|
|
|
|
·
|
15,000,000 shares of our
common stock underlying our Credit Agreement;
|
|
|
|
|
|
·
|
8,248,381 shares of our
common stock that are reserved for equity awards that may be
granted under our equity incentive plans;
|
|
|
|
|
|
|
·
|
8,000,000 shares of our common stock and
shares of common stock issuable upon the exercise of 8,000,000
warrants, in each case, sold pursuant to a securities purchase
agreement as reported in the current report on the Form 8-K filed
with the SEC on November 21, 2019;
|
|
|
|
|
|
|
·
|
40,800,000 shares of our common stock issued
upon the exercise of 40,800,000 of warrants pursuant to the warrant
exercise agreement in exchange for a reduction of the outstanding
obligations in the amount of $4.08 million under the Credit
Agreement, as reported in the current report on the Form 8-K filed
with the SEC on December 23, 2019; and
|
|
|
|
|
|
·
|
any sales of pre-funded warrants, which, if
sold, would reduce the number of shares of common stock that we are
offering on a one-for-one basis, and shares of our common stock
issuable upon exercise of the warrants to be issued as part of the
units issued in this offering.
|
PLAN OF
DISTRIBUTION
Pursuant to an engagement agreement dated February 5, 2020, we have
engaged H.C. Wainwright & Co., LLC, or the Placement Agent, to
act as our exclusive placement agent in connection with this
offering, on a reasonable best efforts basis, of our shares of
common stock, pre-funded warrants, and common stock warrants
pursuant to this prospectus. The terms of this offering were
subject to market conditions and negotiations between us, the
Placement Agent and prospective investors. The engagement agreement
does not give rise to any commitment by the Placement Agent to
purchase any of our securities, and the Placement Agent will have
no authority to bind us by virtue of the engagement agreement.
Further, the Placement Agent does not guarantee that it will be
able to raise new capital in any prospective offering. The
Placement Agent may engage sub-agents or selected dealers to assist
with the offering.
We
will enter into a securities purchase agreement directly with
investors in connection with this offering. Investors who do not
enter into a securities purchase agreement shall rely solely on
this prospectus in connection with the purchase of our securities
in this offering.
We
will deliver the securities being issued to the investors upon
receipt of investor funds for the purchase of the securities
offered pursuant to this prospectus. We expect to deliver the
shares of our common stock being offered pursuant to this
prospectus on or about February ___, 2020.
Fees and
Expenses
We have agreed to pay to
the Placement Agent a cash fee equal to 7.5% of the aggregate gross
proceeds raised in this offering. The following table shows the per
share and common warrant and per pre-funded warrant and common
warrant Placement Agent’s fees payable to the Placement Agent by us
in connection with this offering. The total Placement Agent’s fee
below assumes the purchase of all of the securities we are
offering.
|
Per share
of common stock and accompanying common warrant placement agent
cash fees
|
|
$ |
375,000 |
|
|
Per
pre-funded warrant and accompanying common warrant placement agent
cash fee
|
|
|
- |
|
|
Total
|
|
$ |
375,000 |
|
We estimate the total expenses payable by us
for this offering to be approximately $687,900 , which amount
includes (i) a Placement Agent’s cash fee of $375,000, assuming the
purchase of all of the securities we are offering; (ii) a
management fee equal to 1% of the aggregate gross proceeds raised
in this offering; (iii) a $25,000 non-accountable expense allowance
payable to the Placement Agent; (iv) reimbursement of the
accountable expenses of the Placement Agent equal to $75,000
including the legal fees of the Placement Agent being paid by us
(none of which has been paid in advance); (v) the Placement Agent’s
clearing expenses in the amount of $12,900 in connection with this
offering; (vi) the costs associated with the use of a third-party
electronic road show service; and (vii) additional legal,
accounting, registration and miscellaneous fees. We also have
granted the placement agent a tail cash fee ranging from 7.5% to
6.0% of the gross proceeds and warrants to purchase shares of
common stock equal to 7.0% of the aggregate number of shares of
common stock sold in any offering, within 12 months of the
termination of the placement agent’s engagement, to investors whom
the placement agent contacted or introduced to us directly or
indirectly in connection with this offering. See “Placement Agent’s
Warrants” below for additional detail.
Placement Agent’s
Warrants
We have agreed to issue
to the Placement Agent warrants to purchase shares of our common
stock which represent 7.0% of the number of shares of common stock
and pre-funded warrants being sold in this offering. The Placement
Agent’s Warrants will have a term of five years from the effective
date of this prospectus and an exercise price per share equal to
$0.31 per share based on the assumed public offering price of
$0.25, which represents 125% of the public offering price for the
shares sold in this offering. Pursuant to FINRA Rule 5110(g), the
Placement Agent’s Warrants and any shares issued upon exercise of
the Placement Agent’s Warrants shall not be sold, transferred,
assigned, pledged, or hypothecated, or be the subject of any
hedging, short sale, derivative, put or call transaction that would
result in the effective economic disposition of the securities by
any person for a period of 180 days immediately following the date
of effectiveness or commencement of sales of this offering, except
the transfer of any security: (i) by operation of law or by reason
of our reorganization; (ii) to any FINRA member firm participating
in the offering and the officers or partners thereof, if all
securities so transferred remain subject to the lock-up restriction
set forth above for the remainder of the time period; (iii) if the
aggregate amount of our securities held by the Placement Agent or
related persons does not exceed 1% of the securities being offered;
(iv) that is beneficially owned on a pro rata basis by all equity
owners of an investment fund, provided that no participating member
manages or otherwise directs investments by the fund and the
participating members in the aggregate do not own more than 10% of
the equity in the fund; or (v) the exercise or conversion of any
security, if all securities remain subject to the lock-up
restriction set forth above for the remainder of the time
period.
Right
of First Refusal
We have also granted the
placement agent a 9-month right of first refusal to act as our
exclusive underwriter or placement agent for any further non-self
directed capital raising transactions undertaken by us.
Determination of
Offering Price
The assumed public
offering price used herein is $0.25 per unit, and the resulting
number of shares offered hereby as reflected in this prospectus,
has been arbitrarily determined and is approximately based on the
last reported sale price of our common stock on December 20, 2019.
However, the final public offering price will be a negotiated price
and the final number of shares offered hereby will be based on such
negotiated offering price.
State Blue Sky
Information
In connection with this
offering, we will rely on exemptions from registration for sales of
securities in this offering solely to institutional investors
pursuant to an exemption provided for sales to these investors
under the state Blue Sky laws. The definition of an “institutional
investor” varies from state to state but generally includes
financial institutions, broker-dealers, banks, insurance companies
and other qualified entities.
Transfer Agent and
Registrar
Our independent transfer
agent is ClearTrust LLC, 16540 Pointe Village Drive, Suite 210,
Lutz, Florida 33558.
Stock Market
Listing
Our common stock trades
on the OTCQB under the symbol “EMBI”.
We do not intend to
apply to list the warrants to be issued as part of the units we are
offering on the OTCQB or any other exchange.
Indemnification
We have agreed to
indemnify the Placement Agent and specified other persons against
some civil liabilities, including liabilities under the Securities
Act, and the Securities Exchange Act of 1934, as amended, or the
Exchange Act, and to contribute to payments that the Placement
Agent may be required to make in respect of such liabilities.
Regulation M
The Placement Agent may
be deemed to be an underwriter within the meaning of Section
2(a)(11) of the Securities Act and any fees received by it and any
profit realized on the sale of the securities by it while acting as
principal might be deemed to be underwriting discounts or
commissions under the Securities Act. The Placement Agent will be
required to comply with the requirements of the Securities Act and
the Exchange Act including, without limitation, Rule 10b-5 and
Regulation M under the Exchange Act. These rules and regulations
may limit the timing of purchases and sales of our securities by
the Placement Agent. Under these rules and regulations, the
Placement Agent may not (i) engage in any stabilization activity in
connection with our securities; and (ii) bid for or purchase any of
our securities or attempt to induce any person to purchase any of
our securities, other than as permitted under the Exchange Act,
until they have completed their participation in the
distribution.
Other
Relationships
The Placement Agent and its respective
affiliates have in the past and may in the future engage in
investment banking and other commercial dealings in the ordinary
course of business with us or our affiliates. The Placement Agent
has received, or may in the future receive, customary fees and
commissions for these transactions.
DESCRIPTION OF
SECURITIES
We are offering, on a “best efforts” basis,
up to 20,000,000 units at a price per unit of $___, each unit
consisting of (i) one share of our common stock or one pre-funded
warrant to purchase one share of common stock , and (ii) one
warrant to purchase one share of common stock. Each warrant will
entitle the holder to purchase one share of common stock. The
warrants will expire five years from the date of issuance. The
pre-funded warrants will be exercisable immediately and may be
exercised at any time until all of the pre-funded warrants are
exercised in full. This offering also relates to the shares of
common stock issuable upon exercise of any pre-funded warrants sold
in this offering. For each pre-funded warrant we sell, the number
of shares of common stock we are offering will be decreased on a
one-for-one basis.
The following
description is qualified in its entirety by the provisions of our
articles of incorporation, as amended (including all certificates
of designation relating to our preferred stock), and our bylaws,
all of which are incorporated by reference as exhibits to our
registration statement, of which this prospectus forms a part.
Common Stock
The Company’s articles of incorporation, as
amended, authorize us to issue 500,000,000 shares of common stock,
par value $0.001 per share, of which 182,895,247 shares are issued
and outstanding as of February 6, 2020, and 20,000,000 shares of
Preferred Stock, $0.001 par value per share, none of which are
outstanding
Voting Rights
Holders of our common
stock are entitled to one vote for each share held of record on all
matters on which stockholders are entitled to vote generally,
including the election or removal of directors. The holders of our
common stock do not have cumulative voting rights in the election
of directors. The rights, powers, preferences and privileges of
holders of our common stock are subject to those of the holders of
our outstanding preferred stock and will be subject to those of the
holders of any shares of our preferred stock we may authorize and
issue in the future.
Our bylaws provide that
the presence in person or by proxy of the holders of a majority of
the votes entitled to be cast on a matter at a meeting shall
constitute a quorum of stockholders for that matter. If a quorum
exists, and unless a higher proportion of the votes is required
pursuant to our articles of incorporation or applicable law, an
action of the stockholders entitled to vote on a particular matter
shall be approved if the votes cast in favor such action exceed the
votes cast against such action. However, our bylaws further provide
that directors are to be elected by a majority of the shares
entitled to vote, either in person or by proxy, at the meeting held
for the purpose of such election. Pursuant to our bylaws and Nevada
law, a director may be removed by the vote of stockholders
representing not less than two-thirds of the voting power of the
issued and outstanding stock entitled to vote.
Our bylaws also permit
stockholders to take action by written consent pursuant to Nevada
law, which provides that any action required or permitted to be
taken at a meeting of the stockholders may be taken without a
meeting if, before or after the action, a written consent thereto
is signed by stockholders holding at least a majority of the voting
power, except that if a different proportion of voting power is
required for such an action at a meeting, then that proportion of
written consents is required.
Dividend
Rights
The holders of our
common stock are entitled to receive such dividends as may be
declared by our Board out of funds legally available for dividends.
Our Board is not obligated to declare a dividend. Any future
dividends will be subject to the discretion of our board of
directors and will depend upon, among other things, future
earnings, the operating and financial condition of our company, its
capital requirements, general business conditions and other
pertinent factors. We do not anticipate that dividends will be paid
in the foreseeable future.
Miscellaneous Rights
and Provisions
In the event of our
liquidation or dissolution, whether voluntary or involuntary, each
share of our common stock is entitled to share ratably in any
assets available for distribution to holders of our common stock
after satisfaction of all liabilities.
Our common stock is not
convertible or redeemable and has no conversion rights. There are
no conversions, redemption, sinking fund or similar provisions
regarding our common stock.
Our common stock, after
the fixed consideration thereof has been paid or performed, is not
subject to assessment, and the holders of our common stock are not
individually liable for the debts and liabilities of our
company.
No stockholder shall be
entitled as a matter of right to subscribe for or receive
additional shares of any class of our stock, whether presently or
hereafter authorized, or any bonds, debentures or securities
convertible into stock, but such additional shares of stock or
other securities convertible into stock may be issued or disposed
of by our Board to such persons and on such terms as in its
discretion it shall deem advisable.
Our bylaws provide that
any provision of our bylaws may be amended by a majority vote of
the stockholders at any annual meeting or at any special meeting
called for that purpose. Our Board may amend the bylaws or adopt
additional bylaws, but is not permitted to alter or repeal any
bylaw adopted by our stockholders.
Anti-Takeover
Provisions
Some features of the
Nevada Revised Statutes (the “NRS”), which are further described
below, may have the effect of deterring third parties from making
takeover bids for control of our company or may be used to hinder
or delay a takeover bid. This would decrease the chance that our
stockholders would realize a premium over market price for their
shares of common stock as a result of a takeover bid.
Business Combinations
and Acquisition of Control Shares
Pursuant to provisions
in our articles of incorporation, we have elected not to be
governed by certain Nevada statutes that may have the effect of
discouraging corporate takeovers.
Nevada’s “combinations
with interested stockholders” statutes (NRS 78.411 through 78.444,
inclusive) prohibit specified types of business “combinations”
between certain Nevada corporations and any person deemed to be an
“interested stockholder” for two years after such person first
becomes an “interested stockholder” unless the corporation’s board
of directors approves the combination (or the transaction by which
such person becomes an “interested stockholder”) in advance, or
unless the combination is approved by the board of directors and
sixty percent of the corporation’s voting power not beneficially
owned by the interested stockholder, its affiliates and associates.
Furthermore, in the absence of prior approval certain restrictions
may apply even after such two-year period. For purposes of these
statutes, an “interested stockholder” is any person who is (1) the
beneficial owner, directly or indirectly, of ten percent or more of
the voting power of the outstanding voting shares of the
corporation, or (2) an affiliate or associate of the corporation
and at any time within the two previous years was the beneficial
owner, directly or indirectly, of ten percent or more of the voting
power of the then-outstanding shares of the corporation. The
definition of the term “combination” is sufficiently broad to cover
most significant transactions between a corporation and an
“interested stockholder.” Our original articles of incorporation
provided that these statutes will not apply to us and such
provision remains in effect.
Nevada’s “acquisition of
controlling interest” statutes (NRS 78.378 through 78.3793,
inclusive) contain provisions governing the acquisition of a
controlling interest in certain Nevada corporations. These “control
share” laws provide generally that any person that acquires a
“controlling interest” in certain Nevada corporations may be denied
voting rights, unless a majority of the disinterested stockholders
of the corporation elects to restore such voting rights. Our
original articles of incorporation provided that these statutes
will not apply to us and such provision remains in effect. Absent
such a provision in our articles of incorporation or bylaws, these
laws would apply to us if we were to have 200 or more stockholders
of record (at least 100 of whom have addresses in Nevada appearing
on our stock ledger) and do business in the State of Nevada
directly or through an affiliated corporation, unless our articles
of incorporation or bylaws in effect on the tenth day after the
acquisition of a controlling interest provide otherwise. These laws
provide that a person acquires a “controlling interest” whenever a
person acquires shares of a subject corporation that, but for the
application of these provisions of the NRS, would enable that
person to exercise (1) one-fifth or more, but less than one-third,
(2) one-third or more, but less than a majority or (3) a majority
or more, of all of the voting power of the corporation in the
election of directors. Once an acquirer crosses one of these
thresholds, shares which it acquired in the transaction taking it
over the threshold and within the 90 days immediately preceding the
date when the acquiring person acquired or offered to acquire a
controlling interest become “control shares” to which the voting
restrictions described above apply.
In addition, NRS 78.139
also provides that directors may resist a change or potential
change in control if the directors, by majority vote of a quorum,
determine that the change is opposed to, or not in, the best
interests of the corporation.
Preferred
Stock
Our articles of
incorporation authorized the issuance of up to 20,000,000 shares of
preferred stock in one or more series with such designations,
voting powers, if any, preferences and relative, participating,
optional or other special rights, and such qualifications,
limitations and restrictions, as are determined by our Board in
accordance with Nevada law. No shares of preferred stock are
outstanding as of the date of this prospectus.
Warrants
As of February 6, 2020, we had outstanding
warrants to purchase an aggregate of 25,143,250 shares of our
common stock.
Common Stock
Warrants to be issued in this offering
The following is a
summary of the material terms of the warrants to be issued as part
of the units issued in this offering. This summary is not complete
and is qualified in its entirety by reference to the warrants, the
form of which has been filed as an exhibit to the registration
statement of which this prospectus is a part. All warrants will be
issued in book-entry, or uncertificated, form.
Exercisability
Each warrant will be exercisable at any time
and will expire five years from the date of issuance. The warrants
will be exercisable, at the option of each holder, in whole or in
part by delivering to us a duly executed exercise notice and
payment in full for the number of shares of our common stock
purchased upon such exercise, except in the case of a cashless
exercise as discussed below.
The number of shares of
common stock issuable upon exercise of the warrants is subject to
adjustment in certain circumstances, including a stock split of,
stock dividend on, or a subdivision, combination or
recapitalization of the common stock.
Cashless
Exercise
If at the time of
exercise there is no effective registration statement registering,
or the prospectus contained therein is not available for issuance
of, the shares issuable upon exercise of the warrant, the holder
may only exercise the warrant on a cashless basis. When exercised
on a cashless basis, a portion of the warrant is cancelled in
payment of the purchase price payable in respect of the number of
shares of our common stock purchasable upon such exercise.
Exercise
Price.
Each warrant represents
the right to purchase one share of common stock at an assumed
exercise price of $0.35 per share. In addition, the exercise price
per share is subject to adjustment for stock dividends,
distributions, subdivisions, combinations, or reclassifications.
Subject to limited exceptions, a holder of warrants will not have
the right to exercise any portion of the warrant to the extent
that, after giving effect to the exercise, the holder, together
with its affiliates, and any other person acting as a group
together with the holder or any of its affiliates, would
beneficially own in excess of 4.99% of the number of shares of our
common stock outstanding immediately after giving effect to its
exercise. The holder, upon notice to the Company, may increase or
decrease the beneficial ownership limitation provisions of the
warrant, provided that in no event shall the limitation exceed
9.99% of the number of shares of our common stock outstanding
immediately after giving effect to the exercise of the warrant.
Transferability.
Subject to applicable
laws and restrictions, a holder may transfer a warrant upon
surrender of the warrant to us with a completed and signed
assignment in the form attached to the warrant. The transferring
holder will be responsible for any tax that liability that may
arise as a result of the transfer.
Rights as
Stockholder.
Except as set forth in
the warrant, the holder of a warrant, solely in such holder’s
capacity as a holder of a warrant, will not be entitled to vote, to
receive dividends, or to any of the other rights of our
stockholders.
Fundamental
Transactions.
In the event we effect
certain mergers, consolidations, sales of substantially all of our
assets, tender or exchange offers, reclassifications or share
exchanges in which our common stock is effectively converted into
or exchanged for other securities, cash or property, we consummate
a business combination in which another person acquires 50% of the
outstanding shares of our common stock, or any person or group
becomes the beneficial owner of 50% of the aggregate ordinary
voting power represented by our issued and outstanding common
stock, then, upon any subsequent exercise of the warrants, the
holders of the warrants will have the right to receive any shares
of the acquiring corporation or other consideration it would have
been entitled to receive if it had been a holder of the number of
shares of common stock then issuable upon exercise of the
warrants.
Amendments and
Waivers.
The provisions of each
warrant may be modified or amended or the provisions thereof waived
with the written consent of us and the holder.
Pre-Funded Warrants to be issued
in this offering
Duration and Exercise
Price
Each pre-funded warrant
offered hereby will have an initial exercise price per share equal
to $0.001. The pre-funded warrants will be immediately exercisable
and may be exercised at any time until the pre-funded warrants are
exercised in full. The exercise price and number of shares of
common stock issuable upon exercise is subject to appropriate
adjustment in the event of stock dividends, stock splits,
reorganizations or similar events affecting our common stock and
the exercise price.
Exercisability
The pre-funded warrants
will be exercisable, at the option of each holder, in whole or in
part, by delivering to us a duly executed exercise notice
accompanied by payment in full for the number of shares of our
common stock purchased upon such exercise (except in the case of a
cashless exercise as discussed below). A holder (together with its
affiliates) may not exercise any portion of the pre-funded warrant
to the extent that the holder would own more than 4.99% of the
outstanding common stock immediately after exercise, except that
upon at least 61 days’ prior notice from the holder to us, the
holder may increase the amount of ownership of outstanding stock
after exercising the holder’s pre-funded warrants up to 9.99% of
the number of shares of our common stock outstanding immediately
after giving effect to the exercise, as such percentage ownership
is determined in accordance with the terms of the pre-funded
warrants. Purchasers of pre-funded warrants in this offering may
also elect prior to the issuance of the pre-funded warrants to
those purchasers to have the initial exercise limitation set at
9.99% of our outstanding common stock.
Transferability
Subject to applicable
laws, the pre-funded warrants are separately tradeable immediately
after issuance at the option of the holders and may be transferred
at the option of the holders upon surrender of the pre-funded
warrant to us together with the appropriate instruments of
transfer.
No Listing
There is no established
public trading market for the pre-funded warrants and we do not
expect a market to develop. In addition, we do not intend to apply
for listing of the pre-funded warrants on any securities exchange
or trading system. Without an active market, the liquidity of the
pre-funded warrants will be limited.
Fundamental
Transactions
In the
event we effect certain mergers, consolidations, sales of
substantially all of our assets, tender or exchange offers,
reclassifications or share exchanges in which our common stock is
effectively converted into or exchanged for other securities, cash
or property, we consummate a business combination in which another
person acquires 50% of the outstanding shares of our common stock,
or any person or group becomes the beneficial owner of 50% of the
aggregate ordinary voting power represented by our issued and
outstanding common stock, then, upon any subsequent exercise of the
pre-funded warrants, the holders of the pre-funded warrants will
have the right to receive any shares of the acquiring corporation
or other consideration it would have been entitled to receive if it
had been a holder of the number of shares of common stock then
issuable upon exercise of the pre-funded warrants.
Cashless
Exercise
If at the
time of exercise there is no effective registration statement
registering, or the prospectus contained therein is not available
for issuance of, the shares issuable upon exercise of the
pre-funded warrant, the holder may only exercise the pre-funded
warrant on a cashless basis. When exercised on a cashless basis, a
portion of the pre-funded warrant is cancelled in payment of the
purchase price payable in respect of the number of shares of our
common stock purchasable upon such exercise.
Rights as a
Stockholder
Except as otherwise
provided in the pre-funded warrant or by virtue of a holder’s
ownership of shares of our common stock, the holders of the
pre-funded warrants do not have the rights or privileges of holders
of our common stock, including any voting rights, until they
exercise their pre-funded warrants.
Amendments and
Waivers
The provisions of each
pre-funded warrant may be modified or amended or the provisions
thereof waived with the written consent of us and the holder.
No Fractional
Shares
No fractional shares or
scrip representing fractional shares shall be issued upon the
exercise of the pre-funded warrants. As to any fraction of a share
which the holder would otherwise be entitled to purchase upon such
exercise, we shall or shall cause, at our option, the payment of a
cash adjustment in respect of such final fraction in an amount
equal to such fraction multiplied by the exercise price of the
pre-funded warrant per whole share or round such fractional share
up to the nearest whole share.
Placement Agent
Warrants
In addition, we have agreed to issue to the
placement agent the Placement Agent Warrants to purchase up to 7.0%
of the aggregate number of shares of our common stock included to
be sold in this offering, including shares of common stock issuable
upon the exercise of pre-funded warrants. The Placement Agent
Warrants will have a term of five years and an exercise price equal
to 125% of the purchase price per share of common stock in this
offering.
BUSINESS
History
The Company was
incorporated in the State of Nevada on March 16, 2011 as Load Guard
Transportation, Inc., and subsequently changed its name to Load
Guard Logistics, Inc. in 2012.
On October 31, 2014,
Load Guard Logistics, Inc. ( LGL ) closed an Agreement and Plan of
Merger, dated October 17, 2014 (the Merger Agreement ), with Nemus
Acquisition Corp. ( Acquisition Sub ), Nemus Bioscience, Inc. (
Name Change Merger Sub ), and Nemus ( Nemus ), pursuant to which
Acquisition Sub merged with and into Nemus and Nemus survived as a
wholly-owned subsidiary of LGL (the Merger ). On November 3, 2014,
LGL changed its name to Nemus Bioscience, Inc. by merging with Name
Change Merger Sub.
On October 31, 2014,
immediately prior to the consummation of the Merger, the Company
entered into an Assignment and Assumption Agreement with LGT, Inc.,
a wholly owned subsidiary, pursuant to which the Company
transferred all of its assets and liabilities to LGT.
On October 31, 2014, the
Company entered into a Share Repurchase and Cancellation Agreement
with LGT, Yosbani Mendez and Francisco Mendez, pursuant to which
the Company repurchased 5,431,460 shares of its common stock from
Yosbani Mendez and Francisco Mendez for a repurchase price of all
of the issued and outstanding shares of LGT. Upon the repurchase,
the Company cancelled all of such repurchased shares.
Prior to the Merger, we
were a transportation and logistics company engaged primarily in
hauling truckload shipments of general commodities in both
interstate and intrastate commerce. Following the Merger, we became
a biopharmaceutical company focused on the discovery, development
and commercialization of cannabinoid-based therapeutics.
In January 2018, the
Company entered into a securities purchase agreement with Emerald
Health Sciences, pursuant to which Emerald Health Sciences
purchased a majority of the outstanding equity in the Company,
resulting in a change in control of the Company. As part of the
transaction, the members of the Company s Board, with the exception
of Dr. Brian Murphy, the Company's CEO, tendered their resignation,
and Emerald Health Sciences appointed two nominees to the Board. In
October 2018, the Board appointed Dr. Avtar Dhillon, the Chairman,
CEO and President of Emerald Health Sciences, as the Executive
Chairman of the Company s Board. On December 17, 2019, the Board
accepted the resignation of Dr. Avtar Dhillon, who offered his
resignation as the Executive Chairman of the Board and the position
of Chairman of the Finance and Business Development Committee of
the Board.
Effective March 25,
2019, the Company changed its name to Emerald Bioscience, Inc.
In August 2019, we
formed a new subsidiary in Australia, EMBI Australia Pty Ltd. in
order to qualify for the Australian government’s research and
development tax credit for research and development dollars spent
in Australia. The primary purpose of EMBI Australia Pty Ltd. is to
conduct clinical trials for our product candidates.
As of the date of this
prospectus, the Company has devoted substantially all of its
efforts to securing product licenses, carrying out research and
development activities, building infrastructure and raising
capital. We have not yet realized revenue from our planned
principal operations.
Business
Overview
We are a
biopharmaceutical company targeting the discovery, development and
commercialization of cannabinoid-based therapeutics through a
number of license agreements with the University of Mississippi
(“UM”). UM holds the only contract to cultivate cannabis for
research purposes on behalf of the Federal Government of the United
States since 1968, and it has significant expertise in cannabis
cultivation and the extraction, separation, processing and
manufacture of cannabis extracts as well as the chemistry and
physiology of cannabinoid molecules. We were established and
continue to be, a development and commercialization partner of UM,
working to bring the University’s proprietary cannabinoid molecules
through the development process.
Our Strategic
Partnership
In July 2013, we entered
into a Memorandum of Understanding (the “MOU”), with UM to engage
in joint research of extracting, manipulating, and studying
cannabinoids in certain forms to develop intellectual property with
the intention of creating and commercializing therapeutic
medicines. The MOU provided that we own all intellectual property
developed solely by our employees and will jointly own all
intellectual property developed jointly between Emerald Bioscience
and UM employees. The term of the MOU was five years and the
parties agreed to enter into separate research agreements upon the
identification of patentable technologies. This MOU resulted in the
Company entering into several licenses and research agreements with
UM related to a prodrug of tetrahydrocannabinol (“THC”) and an
analog of cannabidiol (“CBD”). The term of the MOU expired in 2018
and was not renewed because the Company and UM had entered into a
number of licenses for the aforementioned compounds.
UM 5050 Pro-Drug
and UM 8930 Analog Agreements
In July 2018, the
Company renewed its ocular licenses for UM 5050, related to the
pro-drug formulation of tetrahydrocannabinol (“THC”), and UM 8930,
related to an analog formulation of cannabidiol (“CBD”). On May 24,
2019, the ocular delivery licenses were replaced by “all fields of
use” licenses for both UM 5050 and UM 8930 (the “License
Agreements”). Pursuant to these license agreements, UM granted the
Company an exclusive, perpetual license, including, with the prior
written consent of UM, the right to sublicense, to intellectual
property related to UM 5050 and UM 8930 for all fields of use.
The License Agreements
contain certain milestone payments, royalty and sublicensing fees
payable by the Company, as defined therein. Each License Agreement
provides for an annual maintenance fee of $75,000 payable on the
anniversary of the effective date. The upfront payment for UM 5050
is $100,000 and the upfront payment for UM 8930 is $200,000.
Additionally, there is also a $200,000 fee due within 30 days upon
receipt of the first United States Patent and Trademark Office
Notice of Allowance for UM 8930. The milestone payments payable for
each license are as follows:
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i)
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$100,000 paid within 30 days
following the submission of the first Investigational New Drug
Application to the Food and Drug Administration or an equivalent
application to a regulatory agency anywhere in the world, for a
product;
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ii)
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$200,000 paid within 30 days
following the first submission of a NDA, or an equivalent
application to a regulatory agency anywhere in the world, for each
product that is administered in a different route of administration
from that of the early submitted product(s); and
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iii)
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$400,000 paid within 30 days
following the approval of a NDA, or an equivalent application to a
regulatory agency anywhere in the world, for each product that is
administered in a different route of administration from that of
the early approved product(s).
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The royalty percentage
due on net sales under each License Agreement is in the mid-single
digits. The Company must also pay to UM a portion of all licensing
fees received from any sublicensees, subject to a minimum royalty
on net sales, and the Company is required to reimburse patent costs
incurred by UM related to the licensed products. The royalty
obligations apply by country and by licensed product, and end upon
the later of the date that no valid claim of a licensed patent
covers a licensed product in a given country, or 10 years after the
first commercial sale of such licensed product in such country.
Each License Agreement
continues, unless terminated, until the later of the expiration of
the last to expire of the patents or patent applications within the
licensed technology or the expiration of our payment obligations
under the License Agreement. UM may terminate each License
Agreements, by giving written notice of termination, upon the
Company’s material breach of the License Agreement, including
failure to make payments or satisfy covenants, representations or
warranties without cure, noncompliance, a bankruptcy event, the
Company’s dissolution or cessation of operations, the Company’s
failure to make reasonable efforts to commercialize at least one
product or failure to keep at least one product on the market after
the first commercial sale for a continuous period of one year,
other than for reasons outside the Company’s control, or the
Company’s failure to meet certain pre-established development
milestones. The Company may terminate each License Agreement upon
60 days’ written notice to UM.
UM 5070 License
Agreement
In January 2017, we
entered into a license agreement with UM pursuant to which UM
granted us an exclusive, perpetual license, including the right to
sublicense, to intellectual property related to a platform of
cannabinoid-based molecules (“UM 5070”), to research, develop and
commercialize products for the treatment of infectious diseases.
The license agreement culminates roughly one year of screening and
target molecule identification studies especially focused on
therapy-resistant infectious organisms like Methicillin-resistant
Staphylococcus aureus (“MRSA”).
We paid UM an upfront
license fee under the license agreement. Under the license
agreement, we are also responsible for annual maintenance fees that
will be credited against royalties in the current fiscal year,
contingent milestone payments upon achievement of development and
regulatory milestones, and royalties on net sales of licensed
products sold for commercial use. The aggregate milestone payments
due under the license agreement if all of the milestones are
achieved is $700,000 and the royalty percentage due on net sales is
in the mid-single digits. We must also pay to UM a percentage of
all licensing fees we receive from any sublicensees, subject to a
minimum royalty on net sales by such sublicensees. Our royalty
obligations apply on a country by country and licensed product by
licensed product basis, and end upon the later of the date that no
valid claim of a licensed patent covers a licensed product in a
given country, or ten years after first commercial sale of such
licensed product in such country.
The license agreement
continues, unless terminated, until the later of the expiration of
the last to expire of the patents or patent applications within the
licensed technology or expiration of our payment obligations under
the license. UM may terminate the license agreement, effective with
the giving of notice, if: (a) we fail to pay any material amount
payable to UM under the license agreement and do not cure such
failure within 60 days after UM notifies us of such failure, (b) we
materially breach any covenant, representation or warranty in the
license agreement and do not cure such breach within 60 days after
UM notifies us of such breach, (c) we fail to comply in any
material respect with the terms of the license and do not cure such
noncompliance within 60 days after UM notifies us of such failure,
(d) we are subject to a bankruptcy event, (e) we dissolve or cease
operations or (f) if after the first commercial sale of a product
during the term of the license agreement, we materially fail to
make reasonable efforts to commercialize at least one product or
fail to keep at least one product on the market after the first
commercial sale for a continuous period of 1 year, other than for
reasons outside our control. We may terminate the license agreement
upon 60 days’ written notice to UM.
Our Product
Candidates
Cannabinoids are a class
of chemically diverse compounds that are mainly found in extracts
from the cannabis plant. These compounds express their
physiological response by binding to specific cannabinoid receptors
(CB1 and CB2), which are found throughout the body. Some
cannabinoids have been observed to exert multiple effects on the
human body, including, but not limited to: impacting the immune
response, nervous system function and repair, gastrointestinal
maintenance and motility, motor function in muscles, pancreatic
functionality, modulating inflammation and tissue repair, blood
sugar regulation, and integrity of function in the eye (including
the optic nerve). Cannabis and specific cannabinoids have been
studied widely, with limited published data suggesting the
potential for these compounds to be used in treating many disorders
or alleviating disease-associated symptoms.
We are focused on the
development of early stage cannabinoid product candidates. The
following table summarizes certain information regarding our
cannabinoid product candidates:
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Product Candidate
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Indication
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Development
Status
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NB1111
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Glaucoma
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Preclinical
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NB2222
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Multiple Ocular Targets
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Preclinical
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NB3111
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MRSA
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Research
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NB1111
Glaucoma is an ocular
neuropathy associated with the initiation of programmed cell death,
known as apoptosis, of the retinal ganglion cells (“RGCs”) of the
optic nerve, resulting in progressive and irreversible loss of
vision. Intraocular pressure (“IOP”) has been identified as an
important risk factor in the pathogenesis of this disease. Elevated
IOP can lead to damage of RGC axons through vascular ischemia by
compromising blood flow to the cells, and physical crush injury as
the elevated ocular pressure compresses these delicate cells.
Cannabinoid receptors are highly concentrated in the eye,
especially in organs of the anterior compartment that help regulate
IOP, and the posterior compartment in the area of the retina and
optic nerve. Stimulation of cannabinoid receptors by THC has been
previously shown to lower IOP in both animal and human studies.
Our lead ocular compound
is NB1111, a prodrug of THC. The molecule has been formulated to
make the usually lipophilic THC more hydrophilic to allow for
improved transport across membranes. In 2013 and 2014, UM conducted
studies of the formulation in the rabbit ocular model which showed
that the molecule was able to penetrate all chambers of the eye
which could potentially broaden the proposed therapeutic
indications of interest to diseases of the eye that affect the
retina and optic nerve, such as macular degeneration or diabetic
retinopathy. These studies also revealed that the formulation was
able to achieve potentially therapeutic concentrations in the
anterior compartment, vitreous humor, and posterior compartment of
the normal rabbit eye, which is very similar to the human eye in
anatomy and physiology. The rabbit ocular model is an accepted
animal model for regulatory agencies when considering a candidate
drug for human testing and this data will be submitted as part of
the investigational new drug application (“IND”) to the FDA.
Additional studies using
an alpha-chymotrypsin induced glaucoma model in rabbits were
performed by UM in 2013 and 2014 under a grant from the National
Institutes of Health (the “NIH”). Those studies showed that NB1111
was able to reduce IOP by 45% to 50%. Reduction in IOP was
successful in an almost linear dose-responsive manner, with greater
decline in IOP associated with higher dosage concentration. The
decline in IOP observed in the rabbit model correlated to
historical human data when patients were exposed to systemically
administered THC via inhalational methods. The human studies were
conducted by the NIH and the U.S. Army in the 1970’s where glaucoma
patients for the NIH study and normal volunteers for the U.S. Army
study were exposed to THC by smoking marijuana. Patients tested by
the NIH exhibited a decline in IOP ranging from 35% to as high as
65%, correlated to the amount of THC in the plasma. Normal
volunteers in the U.S. Army study also showed a decrease in IOP of
approximately 10% to 20% in a setting of normotension. While THC
from smoking marijuana was able to reduce IOP in humans, the effect
was short lived given the short half-life of the THC molecule. The
half-life of the pro-drug used in the rabbit glaucoma model was
longer, but still pointed to the need to formulate the pro-drug in
a way to lengthen the half-life that would be consistent with
once-daily dosing of a marketed product.
We examined the compound
in further testing using a nanoparticle delivery system to prolong
the drug’s biologic half-life in late 2015 and 2016. The studies
were conducted by UM and placed NB1111 into a solid
lipid-nanoparticle system (“SLN”) to deliver the drug to the eye
using topical drop administration. The SLN delivery of NB1111 was
administered to rabbits that underwent elevated IOP inducement
using the alpha-chymotrypsin model. Data from that experiment
confirmed previous studies that showed administration of NB1111
resulted in a 45% reduction in IOP from baseline with a half-life
consistent with five to six-times per day dosing. When NB1111 was
administered via SLN delivery, the lower concentration of NB1111
(0.4% equivalent THC) exhibited a decrease in IOP of approximately
20% while the higher concentration of NB1111 (0.6% equivalent THC)
lowered IOP by a maximum of 38%. The use of SLN technology
lengthened the physiologic half-life of NB1111 equivalent to dosing
the drug two to three times a day. Subsequently, the formulation
being developed for human studies will involve encapsulating the
drug in a nanoemulsion complemented with the use of the emulsifier,
Carbopol, to increase the residence time of the drug on the eye.
Testing of this formulation in a normotensive animal model revealed
statistically significant lowering of the IOP when compared to both
latanoprost and timolol, as well as extended pharmacologic activity
time that could possibly support once daily dosing.
Further animal
experimentation conducted in 2016-2017 examined both the
penetration and concentration of NB1111 in key organs of the eye.
The data revealed that IOP declined in a concentration-time
dependent manner and could be correlated to the concentration of
THC in organs regulating IOP, such as the trabecular meshwork in
the anterior compartment and the retina-choroid in the posterior
compartment. The data was important for demonstrating a direct
causal relationship between the penetration and concentration of
THC with IOP-lowering capability and the presence of THC in
multiple compartments of the eye. Additionally, neither free-THC
nor 11-hydroxy-THC (the main active metabolite of THC) was detected
in the peripheral circulation of the test animals, indicating that
the topical dosage of the test compound remained restricted to the
eye.
In the second half of
2020, we anticipate launching the Company’s first in-human studies
of its lead drug candidate, NB1111, to be conducted in healthy
volunteers and patients with glaucoma and ocular hypertension in
Australia (the “Clinical Trial”). Initially, we plan to conduct
single-ascending dose (“SAD”) and multiple-ascending dose (“MAD”)
studies to establish physiological activity in humans to define a
dosing therapeutic window and to validate an ocular formulation for
larger follow-on studies. Subsequently, Phase 2 studies will be
advanced provided initial human clinical data point to IOP lowering
activity balanced by safety parameters. Phase 2 studies in
glaucoma/ocular hypertension are expected to be conducted over 7 to
28 days with supporting safety labs monitored concurrently with
dosing, including validated assays to detect any evidence of THC in
the peripheral circulation of those dosed.. Given that IOP data is
objectively measured, we will decide whether to conduct a
subsequent Phase 2b study or go directly to a larger Phase 3
clinical trial based on the quality of the data collected in the
Phase 2a study and the advice provided by the FDA or other
regulatory bodies.
NB2222
NB2222 is a prototype
ocular formulation of the proprietary Emerald Bioscience CBD
analog. We have embarked on studies with UM exploring the utility
of our drug candidate NB2222 as an eye drop emulsion for the
potential treatment and management of several eye diseases,
including uveitis, dry eye syndrome, macular degeneration and
diabetic retinopathy. Data presented at the American Association of
Pharmaceutical Scientists (AAPS) meeting held in November 2017
revealed that this early formulation of the CBD analog was able to
penetrate multiple compartments of the eye, including reaching the
retina and the optic nerve. Further testing will need to be
conducted to assess biomarkers for the possible utility of this
compound as a therapeutic agent.
NB3111
MRSA was first described
in 1961 after the introduction of the antibiotic, methicillin, and
since that time, the prevalence of the organism has increased
globally in both community and healthcare settings. The prevalence
of MRSA in intensive care units in the United States has been
estimated to be 60% (Am J Infect Control 2004; 32:470) with more
than 90,000 invasive MRSA infections occurring annually in the
United States resulting in more than 18,000 deaths (JAMA 2007; 298:
1763-71). Annual costs for treating MRSA in the United States are
projected to exceed $4 billion, accounting for a collective eight
million extra hospital days annually (ISPOR; 10th Annual
Meeting, Wash D.C., May 2005; Pew Foundation Research Brief, April,
2012).
MRSA is classically
resistant to conventional antibiotics to treat staph infections
such as fluoroquinolones, beta-lactams, and macrolides. Most
patients who develop MRSA infections are usually colonized with
either a community acquired strain (CA-MRSA) or
healthcare-associated strain (HA-MRSA). Therefore, antibiotic
development against MRSA can take three approaches: (a)
decolonization, (b) treatment of localized soft tissue infections,
or (c) systemic antibiotic for generalized sepsis.
Cannabinoid molecules
have been shown in in vitro studies conducted by third parties to
possess anti-infective activity against a variety of MRSA strains.
We entered into a research agreement with UM to explore this area
in 2015 and have tested a variety of cannabinoids in various
strengths, combinations, and delivery systems against a variety of
MRSA species found in community, healthcare, and institutional
settings such as nursing homes, correctional facilities, and
military quarters. As discussed above in “Our Strategic Partnership
– UM 5070 License Agreement,” in January 2017, we entered into a
license agreement with UM pursuant to which UM granted us an
exclusive, perpetual license, including the right to sublicense, to
intellectual property related to UM 5070, a platform of
cannabinoid-based molecules to research, develop and commercialize
products for the treatment of infectious diseases.
Other Potential
Products
The Company continues to
plan to work with UM to explore other potential indications and
associated routes of administration based on the expanded UM 5050
and UM 8930 all fields licenses. The Company’s decision to advance
a potential therapeutic candidate will be influenced by a number of
criteria, including but not limited to pre-clinical data, synthesis
and formulation capability as well as prevailing market
conditions.
Our Competitive
Strengths
Cannabis is subject to
strict regulation in the United States. Cannabis and cannabis
extracts are classified by the U.S. Drug Enforcement Administration
(the “DEA”), as a Schedule I substance, which means that, under
federal law, it has no established medicinal use and may not be
marketed or sold in the United States. In addition, the United
States is a party to the Single Convention on Narcotic Drugs, which
imposes certain requirements and restrictions on member parties
with respect to the cultivation and wholesale trade in cannabis.
Since 1968, UM has held the only contract with the Federal
Government to cultivate cannabis on its behalf for research
purposes and holds the requisite DEA registrations authorizing it
to engage in that activity. The contract, which is open for
competitive bidding at periodic intervals, is administered by the
National Institute on Drug Abuse (“NIDA”), an agency within the
NIH. UM’s current contract was awarded in 2015 and runs for a base
year of one year with four one-year options. Although in August
2016 the DEA announced that it would consider granting
registrations for the cultivation of cannabis for research and
development purposes outside of the NIDA contract process, we are
not aware of any entity that has received such a registration under
this process. As the sole contract holder since 1968, UM has
developed significant expertise in the extraction, separation,
processing and manufacture of cannabinoids. UM has also engaged in
the cultivation of cannabis and the extraction of cannabinoids for
purposes of developing drug product candidates apart from its role
as NIDA contractor. We have entered into several research and
license agreements with UM and view this collaborative association
as a significant strategic advantage in the marketplace.
The only cannabinoid
products that are currently approved as drugs in the United States
and, to our knowledge, all cannabinoid products in late-stage
development, are predominantly orally-delivered products.
Cannabinoids, when ingested orally, are subject to significant
first pass metabolism by the liver and potential drug-drug
interactions, resulting in very high inter-patient and
intra-patient variation in bioavailability which can potentially
compromise both efficacy and safety. This has been published in the
literature and in product labeling by regulatory agencies
worldwide. These independent assessments correlate with highly
variable response rates and safety profiles which, in some cases,
have been deemed to have marginal clinical utility.
We have licensed from UM
the rights to a pro-drug formulation of THC. Data from UM supports
the delivery of the pro-drug through absorptive routes other than
the gastrointestinal tract, which we believe has the potential to
mitigate the issue of first-pass metabolism by the liver,
potentially enhancing drug bioavailability and predictive
pharmacokinetics.
We are also working with
UM and other parties on methods to formulate and deliver a variety
of other pharmaceutical-grade cannabinoids to better manage
symptoms and/or treat diseases.
Our Business
Strategy
Our goal is to become a
premier developer of prescriptive cannabinoid-based medicines for
global markets with significant unmet medical needs. Our current
operating strategy includes:
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selection of potential
clinical targets based on internal and external published data,
access to appropriate cannabinoids, and the impact of both
developmental and market conditions;
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prioritization of product
candidates based on the potential clinical utility of associated
target indications;
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utilization, where feasible,
of naturally-derived drug prototypes leading to synthetically
produced cannabinoid derivatives optimized for development and
commercialization;
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development and execution of
an intellectual property strategy;
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development and advancement
of our current product pipeline;
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outsourcing services, such
as use of Clinical Research Organizations (“CROs”) and contract
manufacturers for the API, where possible and appropriate;
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obtaining regulatory
approval from the FDA, EMA, and other appropriate regulatory
agencies for product candidates;
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research and development of
additional target indications for cannabinoid product candidates;
and
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partnering, out-licensing,
or selling approved products, if any, to optimize Company
efficiencies to bring state-of-the-art therapeutics to
patients.
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Sales and
Marketing
We have not established
a sales, marketing or product distribution infrastructure because
our lead product candidates are still in research, discovery or
preclinical development stages. If and when we obtain approval to
market any of our product candidates, we will evaluate what we
believe to be the optimal commercialization path for the Company,
the respective product candidate, and patients. Commercialization
paths may include licensing, selling, or partnering with other
commercial partners. We may also choose to build a commercial sales
and marketing team for some or all of our product candidates.
Manufacturing
We do not own or
operate, and currently have no plans to establish, any
manufacturing facilities for final manufacture. We currently rely,
and expect to continue to rely, on third parties for the
manufacture of our product candidates for preclinical and clinical
testing, as well as for commercial manufacture of any products that
we may commercialize.
We entered into
agreements with AMRI in February 2016, July 2018 and April 2019 for
the development and manufacture of our proprietary
cannabinoid-based APIs. In late 2016, we finalized a commitment
with Teewinot Life Sciences, working in conjunction with AMRI, to
manufacture biosynthetically produced cannabinoids derivatives
licensed from UM to be used in clinical trials or commercialized
products. It is anticipated that the biosynthetically generated API
will eventually form the basis of our drug candidates NB1111 in
development for glaucoma and NB2222 for ocular diseases. In August
2019, the Company terminated its ongoing agreements with AMRI. The
Company entered into an agreement with Noramco in February 2019 to
develop scale-up synthesis methods and to manufacture the analog
derivative, CBDVHS, and amended the agreement in August 2019 to
include THCVHS.
For all of our future
product candidates, we aim to identify and qualify manufacturers to
provide the API and fill-and-finish services prior to submission of
an NDA to the FDA. We expect to continue to develop drug candidates
that can be produced cost-effectively at contract manufacturing
facilities.
Intellectual
Property
The success of most of
our product candidates will depend in large part on our ability
to:
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obtain and maintain patent
and other legal protections for the proprietary technology,
inventions and improvements we consider important to our
business;
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prosecute our patent
applications and defend any issued patents we obtain;
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preserve the confidentiality
of our trade secrets; and
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operate without infringing
the patents and proprietary rights of third parties.
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We intend to continue to
seek appropriate patent protection for certain of our product
candidates, drug delivery systems, molecular modifications, as well
as other proprietary technologies and their uses by filing patent
applications in the United States and other selected global
territories. We intend for these patent applications to cover,
where possible, claims for medical uses, processes for isolation
and preparation, processes for delivery and formulations.
As of the date of this
prospectus, we have licensed from UM two U.S. patents as well as
foreign counterparts in the United Kingdom, European Union, Japan,
Hong Kong, Canada and Australia. The patents that we license cover
composition of matter and preparation of delta-9 THC amino acid
esters and their methods of use. These patents are expected to
expire in 2034. Under our license agreements, UM retains ownership
over the licensed patents and control over the maintenance and
prosecution of the licensed patents and patent applications. We
also rely upon unpatented trade secrets and know-how and continuing
technological innovation to develop and maintain our proprietary
and intellectual property position. We seek to protect our
proprietary information, in part, using confidentiality agreements
with our collaborators, scientific advisors, employees and
consultants, and invention assignment agreements with our employees
and selected consultants, scientific advisors and collaborators.
The confidentiality agreements are designed to protect our
proprietary information and, in the case of agreements or clauses
requiring invention assignment, to grant us ownership of
technologies that are developed through a relationship with a
third-party.
Competition
Our industry is
characterized by rapidly advancing technologies, intense
competition and a strong emphasis on proprietary products. We face
potential competition from many different sources, such as
pharmaceutical companies, including generic drug companies,
biotechnology companies, drug delivery companies and academic and
research institutions. Many of our potential competitors have
substantially greater financial, scientific, technical,
intellectual property, regulatory and human resources than we do,
and greater experience than we do commercializing products and
developing product candidates, including obtaining FDA and other
regulatory approvals for product candidates. Consequently, our
competitors may develop products for indications we pursue that are
more effective, better tolerated, more widely-prescribed or
accepted, more useful and less costly, and they may also be more
successful in manufacturing and marketing their products. We also
face competition from third parties in recruiting and retaining
qualified personnel, establishing clinical trial sites and
enrolling patients for clinical trials and in identifying and
acquiring or in-licensing new products and product candidates.
Government
Regulation
Government authorities
in the United States, at the federal, state and local level, and in
other countries, extensively regulate, among other things, the
research, development, testing, manufacture, packaging, storage,
recordkeeping, labeling, advertising, promotion, distribution,
marketing, import and export of pharmaceutical products such as
those we are developing. The processes for obtaining regulatory
approvals in the United States and in foreign countries, along with
subsequent compliance with applicable statutes and regulations,
require the expenditure of substantial time and financial
resources. A failure to comply with such laws and regulations or
prevail in any enforcement action or litigation related to
noncompliance could have a material adverse impact on our business,
financial condition and results of operations and could cause the
market value of our common stock to decline.
Regulation of
Cannabis and Cannabinoids
DEA
Regulation
Cannabis, cannabis
extracts and some cannabinoids are regulated as “controlled
substances” as defined in the Controlled Substances Act (the
“CSA”), which establishes registration, security, recordkeeping,
reporting, storage, distribution and other requirements
administered by the DEA. The DEA is concerned with the control of
handlers of controlled substances, and with the equipment and raw
materials used in their manufacture and packaging, in order to
prevent loss and diversion into illicit channels of commerce.
The DEA regulates
controlled substances as Schedule I, II, III, IV or V substances.
Schedule I substances by definition have no established medicinal
use and may not be marketed or sold in the United States. A
pharmaceutical product may be listed as Schedule II, III, IV or V,
with Schedule II substances considered to present the highest risk
of abuse and Schedule V substances the lowest relative risk of
abuse among such substances. Cannabis, cannabis extracts and some
cannabinoids are listed by the DEA as Schedule I controlled
substances under the CSA. Consequently, their manufacture,
shipment, storage, sale and use are subject to a high degree of
regulation. Annual registration is required for any facility that
manufactures, distributes, dispenses, imports or exports any
controlled substance. The registration is specific to the
particular location, activity and controlled substance schedule.
For example, separate registrations are needed for import and
manufacturing, and each registration will specify which schedules
of controlled substances are authorized.
The DEA typically
inspects a facility to review its security measures prior to
issuing a registration. Security requirements vary by controlled
substance schedule, with the most stringent requirements applying
to Schedule I and Schedule II substances. Required security
measures include background checks on employees and physical
control of inventory through measures such as cages, surveillance
cameras and inventory reconciliations. The registered entity must
maintain records for the handling of all controlled substances and
must make periodic reports to the DEA. These include, for example,
distribution reports for Schedule I and II controlled substances,
Schedule III substances that are narcotics, and other designated
substances. The registered entity must also report thefts or losses
of any controlled substance and obtain authorization to destroy any
controlled substance. In addition, special authorization and
notification requirements apply to imports and exports.
In addition, a DEA quota
system controls and limits the availability and production of
controlled substances in Schedule I or II. Distributions of any
Schedule I or II controlled substance must also be accompanied by
special order forms, with copies provided to the DEA. The DEA may
adjust aggregate production quotas and individual production and
procurement quotas from time to time during the year, although the
DEA has substantial discretion in whether or not to make such
adjustments. To meet its responsibilities, the DEA conducts
periodic inspections of registered establishments that handle
controlled substances. In the event of non-compliance, the DEA may
seek civil penalties, refuse to renew necessary registrations, or
initiate proceedings to revoke those registrations. In certain
circumstances, violations could lead to criminal prosecution.
The DEA has conducted a
scientific review of the chemical structure of CBDVHS and
determined that CBDVHS is not a regulated chemical nor controlled
substance under the CSA. This decision by the DEA may help the
Company expand the network of clinical testing sites, permit a
greater cross-section of patients to participate in studies of this
drug, as well as speed the initiation of clinical trials. THCVHS
remains a Schedule I, controlled substance, pending a request to
re-schedule after completion of pivotal clinical trials resulting
in a drug approval by the FDA.
State
Regulation
The states also maintain
separate controlled substance laws and regulations, including
licensing, recordkeeping, security, distribution, and dispensing
requirements. State authorities, including Boards of Pharmacy,
regulate use of controlled substances in each state. Failure to
maintain compliance with applicable requirements, particularly as
manifested in the loss or diversion of controlled substances, can
result in enforcement action that could have a material adverse
effect on our business, operations and financial condition.
The Single Convention
on Narcotic Drugs 1961
Many countries,
including the United States, are parties to the 1961 Single
Convention on Narcotic Drugs (the “Single Convention”), which is an
international treaty that governs international trade and domestic
control of narcotic substances, including cannabis and cannabis
extracts. The Single Convention requires all parties to take
measures to limit the production, manufacture, export, import,
distribution of, trade in, and use and possession of cannabis
exclusively to medical and scientific purposes. In particular, the
Single Convention requires member countries to establish a
government agency to oversee the cultivation of marijuana and
establish a monopoly on the wholesale trade of marijuana, and it
provides that this role must be filled by a single government
agency if the member country’s constitution so permits.
Party members, including
the United States, may interpret and implement their treaty
obligations in a way that restricts our ability to develop and
obtain marketing approval for our product candidates in accordance
with our current plans and partnership with UM.
NIDA
Pursuant to the Single
Convention, NIDA oversees the cultivation of research-grade
cannabis for medicinal research on behalf of the United States
Government. NIDA has historically fulfilled this obligation through
a contract that it administers with UM. UM has been the sole NIDA
contractor to grow cannabis for research purposes since 1968. The
contract is open for competitive bidding at periodic intervals.
Since 1999, the term of the contract has been five years. UM
engaged in a competitive bidding process for the next contract
interval and was awarded the contract in 2015. Under the NIDA
contract, UM grows, harvests, stores, ships and analyzes cannabis
of different varieties, as NIDA requires. In August 2016 the DEA
announced that it would consider granting registrations for the
cultivation of cannabis for research and development purposes
outside of the NIDA contract process. We are not aware of any
entity that has received such a registration under this process to
date.
UM has represented that
it also grows cannabis for purposes of researching cannabis
extracts, and has in the past grown cannabis, purified cannabis
extracts, and distributed extracts for purposes of developing
product candidates, separate and apart from its contract with NIDA.
UM has indicated that it conducted these activities pursuant to
separate registrations from the DEA and that it plans to seek the
necessary additional DEA registrations to conduct the contemplated
activities in connection with our partnership, in compliance with
applicable law and the United States’ obligations under the Single
Convention. However, there is a risk that regulatory authorities
may disagree and decline to authorize UM to engage in these
activities.
U.S. Food and
Drug Administration
In the United States,
pharmaceutical products are subject to extensive regulation by the
FDA. The FDA regulates drugs under the FDCA and its implementing
regulations. The process of obtaining regulatory approvals and the
subsequent compliance with appropriate federal, state, local and
foreign statutes and regulations requires the expenditure of
substantial time and financial resources. Failure to comply with
the applicable U.S. requirements at any time during the product
development process, approval process or after approval, may
subject us to a variety of administrative or judicial sanctions,
such as the FDA’s refusal to approve pending NDAs, withdrawal of an
approval, imposition of a clinical hold, issuance of warning
letters, product recalls, product seizures, total or partial
suspension of production or distribution, injunctions, fines,
refusals of government contracts, restitution, disgorgement or
civil or criminal penalties.
The process required by
the FDA before a drug may be marketed in the United States
generally involves the following:
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completion of preclinical
laboratory tests, animal studies and formulation studies in
compliance with good laboratory practice (“GLP”) regulations;
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submission to the FDA of an
IND, which must become effective before human clinical trials may
begin;
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approval by an institutional
review board (“IRB”) at each clinical site before each trial may be
initiated;
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performance of adequate and
well-controlled human clinical trials in accordance with good
clinical practice (“GCP”) requirements to establish the safety and
efficacy of the proposed drug for each indication;
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submission of a NDA to the
FDA;
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satisfactory completion of
an FDA inspection of the manufacturing facility or facilities at
which the product is produced to assess compliance with cGMP
requirements and to assure that the facilities, methods and
controls are adequate to preserve the drug’s identity, strength,
quality and purity; and
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FDA review and approval of
the NDA.
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Preclinical
Studies
Preclinical studies
include laboratory evaluation of product chemistry, toxicity and
formulation, as well as animal studies to assess potential safety
and efficacy. An IND sponsor must submit the results of the
preclinical tests, together with manufacturing information,
analytical data and any available clinical data or literature,
among other things, to the FDA as part of an IND. Some preclinical
testing may continue even after the IND is submitted. An IND
automatically becomes effective 30 days after receipt by the FDA
unless, before that time, the FDA raises concerns or questions
related to one or more proposed clinical trials and places the
clinical trial on a clinical hold. In such a case, the IND sponsor
and the FDA must resolve any outstanding concerns before the
clinical trial can begin. As a result, submission of an IND may not
result in the FDA allowing clinical trials to commence.
Clinical
Trials
Clinical trials involve
the administration of the investigational new drug to human
subjects under the supervision of qualified investigators in
accordance with GCP requirements, which include the requirement
that all research subjects provide their informed consent in
writing for their participation in any clinical trial. Clinical
trials are conducted under protocols detailing, among other things,
the objectives of the trial, the parameters to be used in
monitoring safety, and the effectiveness criteria to be evaluated.
A protocol for each clinical trial and any subsequent protocol
amendments must be submitted to the FDA as part of the IND. In
addition, an IRB at each institution participating in the clinical
trial must review and approve the plan for any clinical trial
before it commences at that institution. Information about certain
clinical trials must be submitted within specific timeframes to the
NIH for public dissemination on their www.clinicaltrials.gov
website.
Human clinical trials
are typically conducted in three sequential phases, which may
overlap or be combined:
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Phase 1: The drug is
initially introduced into healthy human subjects or patients with
the target disease or condition and tested for safety, dosage
tolerance, absorption, metabolism, distribution, excretion and, if
possible, to gain an early indication of its effectiveness.
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Phase 2: The drug is
administered to a limited patient population to identify possible
adverse effects and safety risks, to preliminarily evaluate the
efficacy of the product for specific targeted diseases and to
determine dosage tolerance and optimal dosage.
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Phase 3: The drug is
administered to an expanded patient population, generally at
geographically dispersed clinical trial sites, in well-controlled
clinical trials to generate enough data to statistically evaluate
the efficacy and safety of the product for approval, to establish
the overall risk-benefit profile of the product, and to provide
adequate information for the labeling of the product.
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Progress reports
detailing the results of the clinical trials must be submitted at
least annually to the FDA and more frequently if serious adverse
events occur. Phase 1, Phase 2 and Phase 3 clinical trials may not
be completed successfully within any specified period, or at all.
Furthermore, the FDA or the sponsor may suspend or terminate a
clinical trial at any time on various grounds, including a finding
that the research subjects are being exposed to an unacceptable
health risk. Similarly, an IRB can suspend or terminate approval of
a clinical trial at its institution if the clinical trial is not
being conducted in accordance with the IRB’s requirements or if the
drug has been associated with unexpected serious harm to
patients.
Marketing
Approval
Assuming successful
completion of the required clinical testing, the results of the
preclinical and clinical studies, together with detailed
information relating to the product’s chemistry, manufacture,
controls and proposed labeling, among other things, are submitted
to the FDA as part of a NDA requesting approval to market the
product for one or more indications. In most cases, the submission
of a NDA is subject to a substantial application user fee. Under
the Prescription Drug User Fee Act (“PDUFA”) guidelines that are
currently in effect, the FDA has a goal of ten months from the date
of “filing” of a standard NDA for a new molecular entity to review
and act on the submission. This review typically takes at least
twelve months from the date the NDA is submitted to the FDA because
the FDA has approximately two months to make a “filing” decision.
However, if issues arise during the review, the FDA may request
additional information and the review period may be extended to
permit the applicant to provide and the FDA to review that
information, which may significantly extend this time period.
In addition, under the
Pediatric Research Equity Act of 2003 (“PREA”), as amended and
reauthorized, certain NDAs or supplements to a NDA must contain
data that is adequate to assess the safety and effectiveness of the
drug for the claimed indications in all relevant pediatric
subpopulations, and to support dosing and administration for each
pediatric subpopulation for which the product is safe and
effective. The FDA may, on its own initiative or at the request of
the applicant, grant deferrals for submission of some or all
pediatric data until after approval of the product for use in
adults, or full or partial waivers from the pediatric data
requirements.
The FDA also may require
submission of REMS plan to ensure that the benefits of the drug
outweigh its risks. The REMS plan could include medication guides,
physician communication plans, assessment plans, and/or elements to
assure safe use, such as restricted distribution methods, patient
registries, or other risk minimization tools.
The FDA conducts a
preliminary review of all NDAs within the first 60 days after
submission, before accepting them for filing, to determine whether
they are sufficiently complete to permit substantive review. The
FDA may request additional information rather than accept a NDA for
filing. In this event, the application must be resubmitted with the
additional information requested. The resubmitted application is
also subject to review before the FDA accepts it for filing. Once
the submission is accepted for filing, the FDA begins an in-depth
substantive review. The FDA reviews a NDA to determine, among other
things, whether the drug is safe and effective and whether the
facility in which it is manufactured, processed, packaged or held
meets standards designed to assure the product’s continued safety,
quality and purity.
The FDA may refer an
application for a novel drug to an advisory committee. An advisory
committee is a panel of independent experts, including clinicians
and other scientific experts, that reviews, evaluates and provides
a recommendation as to whether the application should be approved
and under what conditions. The FDA is not bound by the
recommendations of an advisory committee, but it considers such
recommendations carefully when making decisions.
Before approving a NDA,
the FDA typically will inspect the facility or facilities where the
product is manufactured. The FDA will not approve an application
unless it determines that the manufacturing processes and
facilities are in compliance with cGMP requirements and adequate to
assure consistent production of the product within required
specifications. Additionally, before approving a NDA, the FDA may
inspect one or more clinical trial sites to assure compliance with
GCP requirements.
The testing and approval
process for a NDA requires substantial time, effort and financial
resources, and each may take several years to complete. Data
obtained from preclinical and clinical testing are not always
conclusive and may be susceptible to varying interpretations, which
could delay, limit or prevent regulatory approval. The FDA may not
grant approval on a timely basis, or at all.
After evaluating the NDA
and all related information, including the advisory committee
recommendation, if any, and inspection reports regarding the
manufacturing facilities and clinical trial sites, the FDA may
issue an approval letter, or, in some cases, a complete response
letter. A complete response letter generally contains a statement
of specific conditions that must be met in order to secure final
approval of the NDA and may require additional clinical or
preclinical testing in order for the FDA to reconsider the
application. Even with submission of this additional information,
the FDA ultimately may decide that the application does not satisfy
the regulatory criteria for approval. If and when those conditions
have been met to the FDA’s satisfaction, the FDA will typically
issue an approval letter. An approval letter authorizes commercial
marketing of the drug with specific prescribing information for
specific indications. For some products, such as our product
candidates, an additional step of DEA review and scheduling is
required.
Post-Approval
Requirements
Drugs manufactured or
distributed pursuant to FDA approvals are subject to pervasive and
continuing regulation by the FDA, including, among other things,
requirements relating to recordkeeping, periodic reporting, product
sampling and distribution, advertising and promotion and reporting
of adverse experiences with the product. After approval, most
changes to the approved product, such as adding new indications or
other labeling claims are subject to prior FDA review and approval.
There also are continuing, annual user fee requirements for any
marketed products and the establishments at which such products are
manufactured, as well as new application fees for supplemental
applications with clinical data.
The FDA may impose a
number of post-approval requirements as a condition of approval of
a NDA. For example, the FDA may require post-marketing testing,
including Phase 4 clinical trials, and surveillance to further
assess and monitor the product’s safety and effectiveness after
commercialization.
In addition, drug
manufacturers and other entities involved in the manufacture and
distribution of approved drugs are required to register their
establishments with the FDA and state agencies and are subject to
periodic unannounced inspections by the FDA and these state
agencies for compliance with cGMP requirements. Changes to the
manufacturing process are strictly regulated and often require
prior FDA approval before being implemented. FDA regulations also
require investigation and correction of any deviations from cGMP
requirements and impose reporting and documentation requirements
upon the sponsor and any third-party manufacturers that the sponsor
may decide to use. Accordingly, manufacturers must continue to
expend time, money, and effort in the area of production and
quality control to maintain cGMP compliance.
Once an approval is
granted, the FDA may withdraw the approval if compliance with
regulatory requirements and standards is not maintained or if
problems occur after the product reaches the market.
Later discovery of
previously unknown problems with a product, including adverse
events of unanticipated severity or frequency, or with
manufacturing processes, or failure to comply with regulatory
requirements, may result in mandatory revisions to the approved
labeling to add new safety information; imposition of post-market
studies or clinical trials to assess new safety risks; or
imposition of distribution or other restrictions under a REMS
program.
Other potential
consequences include, among other things:
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restrictions on the
marketing or manufacturing of the product, complete withdrawal of
the product from the market or product recalls;
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fines, warning letters or
holds on post-approval clinical trials;
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refusal of the FDA to
approve pending NDAs or supplements to approved NDAs, or suspension
or revocation of product license approvals;
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product seizure or
detention, or refusal to permit the import or export of products;
or
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injunctions or the
imposition of civil or criminal penalties.
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The FDA strictly
regulates marketing, labeling, advertising and promotion of
products that are placed on the market. Drugs may be promoted only
for the approved indications and in accordance with the provisions
of the approved label. The FDA and other agencies actively enforce
the laws and regulations prohibiting the promotion of off-label
uses, and a company that is found to have improperly promoted
off-label uses may be subject to significant liability.
In addition, the
distribution of prescription pharmaceutical products is subject to
the Prescription Drug Marketing Act (“PDMA”), which regulates the
distribution of drugs and drug samples at the federal level and
sets minimum standards for the registration and regulation of drug
distributors by the states. Both the PDMA and state laws limit the
distribution of prescription pharmaceutical product samples and
impose requirements to ensure accountability in distribution.
Exclusivity and
Approval of Competing Products
Hatch Waxman
Act
Section 505 of the FDCA
describes three types of marketing applications that may be
submitted to the FDA to request marketing authorization for a new
drug. A Section 505(b)(1) NDA is an application that contains full
reports of investigations of safety and efficacy. A 505(b)(2) NDA
is an application that contains full reports of investigations of
safety and efficacy but where at least some of the information
required for approval comes from investigations that were not
conducted by or for the applicant and for which the applicant has
not obtained a right of reference or use from the person by or for
whom the investigations were conducted. This regulatory pathway
enables the applicant to rely, in part, on the FDA’s prior findings
of safety and efficacy for an existing product, or published
literature, in support of its application. Section 505(j)
establishes an abbreviated approval process for a generic version
of approved drug products through the submission of an Abbreviated
New Drug Application (“ANDA”). An ANDA provides for marketing of a
generic drug product that has the same active ingredients, dosage
form, strength, route of administration, labeling, performance
characteristics and intended use, among other things, to a
previously approved product. ANDAs are termed “abbreviated” because
they are generally not required to include preclinical (animal) and
clinical (human) data to establish safety and efficacy. Instead,
generic applicants must scientifically demonstrate that their
product is bioequivalent to, or performs in the same manner as, the
innovator drug through in vitro, in vivo, or other testing. The
generic version must deliver the same amount of active ingredients
into a subject’s bloodstream in the same amount of time as the
innovator drug and can often be substituted by pharmacists under
prescriptions written for the reference listed drug.
Hatch Waxman Patent
Exclusivity
In seeking approval for
a drug through a NDA, applicants are required to list with the FDA
each patent with claims that cover the applicant’s product or a
method of using the product. Upon approval of a drug, each of the
patents listed in the application for the drug is then published in
the FDA’s Approved Drug Products with Therapeutic Equivalence
Evaluations, commonly known as the Orange Book. Drugs listed in the
Orange Book can, in turn, be cited by potential competitors in
support of approval of an ANDA or 505(b)(2) NDA.
The ANDA or 505(b)(2)
NDA applicant is required to certify to the FDA concerning any
patents listed for the approved product in the FDA’s Orange Book,
except for patents covering methods of use for which the ANDA
applicant is not seeking approval. Specifically, the applicant must
certify with respect to each patent that:
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the required patent
information has not been filed;
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the listed patent has
expired;
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the listed patent has not
expired, but will expire on a particular date and approval is
sought after patent expiration; or
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the listed patent is
invalid, unenforceable or will not be infringed by the new
product.
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Generally, the ANDA or
505(b)(2) NDA cannot be approved until all listed patents have
expired, except when the ANDA or 505(b)(2) NDA applicant challenges
a listed drug. A certification that the proposed product will not
infringe the already approved product’s listed patents or that such
patents are invalid or unenforceable is called a Paragraph IV
certification. If the applicant does not challenge the listed
patents or indicate that it is not seeking approval of a patented
method of use, the ANDA or 505(b)(2) NDA application will not be
approved until all the listed patents claiming the referenced
product have expired.
If the ANDA or 505(b)(2)
NDA applicant has provided a Paragraph IV certification to the FDA,
the applicant must also send notice of the Paragraph IV
certification to the NDA and patent holders once the application
has been accepted for filing by the FDA. The NDA and patent holders
may then initiate a patent infringement lawsuit in response to the
notice of the Paragraph IV certification. The filing of a patent
infringement lawsuit within 45 days after the receipt of notice of
the Paragraph IV certification automatically prevents the FDA from
approving the ANDA or 505(b)(2) NDA until the earlier of 30 months,
expiration of the patent, settlement of the lawsuit or a decision
in the infringement case that is favorable to the ANDA
applicant.
Hatch Waxman
Non-Patent Exclusivity
In addition to patent
issues, market and data exclusivity provisions under the FDCA can
delay the submission or the approval of certain applications for
competing products. The FDCA provides a five-year period of
non-patent data exclusivity within the United States to the first
applicant to gain approval of a NDA for a new chemical entity. A
drug is a new chemical entity if the FDA has not previously
approved any other new drug containing the same active moiety,
which is the molecule or ion responsible for the activity of the
drug substance. During the exclusivity period, the FDA may not
accept for review an ANDA or a 505(b)(2) NDA submitted by another
company that references the previously approved drug. However, an
ANDA or 505(b)(2) NDA may be submitted after four years if it
contains a Paragraph IV certification of patent invalidity or
non-infringement. The FDCA also provides three years of marketing
exclusivity for a NDA, 505(b)(2) NDA, or supplement to an existing
NDA or 505(b)(2) NDA if new clinical investigations, other than
bioavailability studies, that were conducted or sponsored by the
applicant, are deemed by the FDA to be essential to the approval of
the application or supplement. Three-year exclusivity may be
awarded for changes to a previously approved drug product, such as
new indications, dosages, strengths or dosage forms of an existing
drug.
This three-year
exclusivity covers only the conditions of use associated with the
new clinical investigations and, as a general matter, does not
prohibit the FDA from approving ANDAs or 505(b)(2) NDAs for other
versions of a drug. Five-year and three-year exclusivity will not
delay the submission or approval of a full NDA; however, an
applicant submitting a full NDA would be required to conduct or
obtain a right of reference to all of the preclinical studies and
adequate and well-controlled clinical trials necessary to
demonstrate safety and effectiveness.
Orphan Drug
Designation and Exclusivity
Under the Orphan Drug
Act, the FDA may designate a product as an orphan drug if it is a
drug intended to treat a disease or condition that affects
populations of fewer than 200,000 individuals in the United States
or, if it affects more than 200,000 individuals in the United
States, there is no reasonable expectation that the cost of
developing and making a drug product available in the United States
for this type of disease or condition will be recovered from sales
of the product. Orphan designation must be requested before
submitting a NDA. Orphan designation does not convey any advantage
in or shorten the duration of the regulatory review and approval
process.
If a product that has
orphan designation subsequently receives the first FDA approval for
the disease or condition for which it has such designation, the
product is entitled to orphan drug exclusivity, which means that
the FDA may not approve any other applications to market the same
drug for the same indication for seven years, except in limited
circumstances, such as a showing of clinical superiority to the
product with orphan exclusivity or inability to manufacture the
product in sufficient quantities. The designation of such drug also
entitles a party to financial incentives such as opportunities for
grant funding towards clinical trial costs, tax advantages and
user-fee waivers. Competitors, however, may receive approval of
different products for the same indication for which the orphan
product has exclusivity or obtain approval for the same product but
for a different indication than that for which the orphan product
has exclusivity.
Federal and State
Fraud and Abuse and Data Privacy and Security Laws and
Regulations
In addition to FDA
restrictions on marketing of pharmaceutical products, federal and
state fraud and abuse laws restrict business practices in the
pharmaceutical industry. These laws include anti-kickback and false
claims laws and regulations as well as data privacy and security
laws and regulations.
The federal
Anti-Kickback Statute prohibits, among other things, knowingly and
willfully offering, paying, soliciting or receiving remuneration to
induce or in return for purchasing, leasing, ordering, or arranging
for or recommending the purchase, lease, or order of any item or
service reimbursable under Medicare, Medicaid or other federal
healthcare programs. The term “remuneration” has been broadly
interpreted to include anything of value. The Anti-Kickback Statute
has been interpreted to apply to arrangements between
pharmaceutical manufacturers on one hand and prescribers,
purchasers, and formulary managers on the other. Although there are
a number of statutory exceptions and regulatory safe harbors
protecting some common activities from prosecution, the exemptions
and safe harbors are drawn narrowly. Practices that involve
remuneration that may be alleged to be intended to induce
prescribing, purchases, or recommendations may be subject to
scrutiny if they do not meet the requirements of a statutory or
regulatory exception or safe harbor. Several courts have
interpreted the statute’s intent requirement to mean that if any
one purpose of an arrangement involving remuneration is to induce
referrals of federal healthcare covered business, the statute has
been violated. In addition, a person or entity does not need to
have actual knowledge of the statute or specific intent to violate
it in order to have committed a violation.
The federal False Claims
Act prohibits any person from knowingly presenting, or causing to
be presented, a false claim for payment to the federal government
or knowingly making, using, or causing to be made or used a false
record or statement material to a false or fraudulent claim to the
federal government. A claim includes “any request or demand” for
money or property presented to the U.S. government. A violation of
the federal Anti-Kickback Statute also constitutes a false or
fraudulent claim for purposes of the civil False Claims Act.
Several pharmaceutical
and other healthcare companies have been prosecuted under these
laws for allegedly providing free product to customers with the
expectation that the customers would bill federal programs for the
product. Other companies have been prosecuted for causing false
claims to be submitted because of the companies’ marketing of
products for unapproved, and thus non-covered, uses. In addition,
many states have similar fraud and abuse statutes or regulations
that apply to items and services reimbursed under Medicaid and
other state programs, or, in several states, apply regardless of
the payor.
The federal HIPAA also
created federal criminal statutes that prohibit knowingly and
willfully executing a scheme to defraud any healthcare benefit
program, including private third party payors and knowingly and
willfully falsifying, concealing or covering up a material fact or
making any materially false, fictitious or fraudulent statement in
connection with the delivery of or payment for healthcare benefits,
items or services. Similar to the Anti-Kickback Statute, a person
or entity does not need to have actual knowledge of the statute or
specific intent to violate it in order to have committed a
violation.
Pharmaceutical companies
are also subject to the civil monetary penalties statute, which
imposes penalties against any person who is determined to have
presented or caused to be presented a claim to a federal health
program that the person knows or should know is for an item or
service that was not provided as claimed or is false or
fraudulent.
In addition, there has
been a recent trend of increased federal and state regulation of
payments made to physicians and other health care providers. The
Patient Protection and Affordable Care Act, as amended by the ACA,
signed into law on March 2010, created new federal requirements for
reporting, by applicable manufacturers of covered drugs, payments
and other transfers of value to physicians and teaching hospitals.
Applicable manufacturers are also required to report annually to
the government certain ownership and investment interests held by
physicians and their immediate family members. In addition, certain
states require implementation of commercial compliance programs and
compliance with the pharmaceutical industry’s voluntary compliance
guidelines and the relevant compliance guidance promulgated by the
federal government, impose restrictions on marketing practices,
and/or tracking and reporting of gifts, compensation and other
remuneration or items of value provided to physicians and other
health care professionals and entities.
We may also be subject
to data privacy and security regulation by both the federal
government and the states in which we conduct our business. HIPAA,
as amended by the Health Information Technology and Clinical Health
Act (“HITECH”) and its implementing regulations, imposes specified
requirements relating to the privacy, security and transmission of
individually identifiable health information. Among other things,
HITECH makes HIPAA’s privacy and security standards directly
applicable to “business associates,” defined as independent
contractors or agents of covered entities that receive or obtain
protected health information in connection with providing a service
on behalf of a covered entity. HITECH also increased the civil and
criminal penalties that may be imposed against covered entities,
business associates and possibly other persons, and gave state
attorneys general new authority to file civil actions for damages
or injunctions in federal courts to enforce the federal HIPAA laws
and seek attorney’s fees and costs associated with pursuing federal
civil actions. In addition, state laws govern the privacy and
security of health information in certain circumstances, many of
which differ from each other in significant ways and may not have
the same requirements, thus complicating compliance efforts.
To the extent that any
of our product candidates, once approved, are sold in a foreign
country, we may be subject to similar foreign laws and regulations,
which may include, for instance, applicable post-marketing
requirements, including safety surveillance, anti-fraud and abuse
laws, and implementation of corporate compliance programs and
reporting of payments or other transfers of value to healthcare
professionals.
The shifting commercial
compliance environment and the need to build and maintain robust
systems to comply with different compliance and/or reporting
requirements in multiple jurisdictions increase the possibility
that a healthcare company may violate one or more of the
requirements. If our operations are found to be in violation of any
of such laws or any other governmental regulations that apply to
us, we may be subject to penalties, including, without limitation,
civil and criminal penalties, damages, fines, the curtailment or
restructuring of our operations, exclusion from participation in
federal and state healthcare programs and imprisonment, any of
which could adversely affect our ability to operate our business
and our financial results.
Coverage and
Reimbursement
Significant uncertainty
exists as to the coverage and reimbursement status of any drug
products for which we obtain regulatory approval. In the United
States and markets in other countries, sales of any products for
which we receive regulatory approval for commercial sale will
depend, in part, on the availability of coverage and reimbursement
from third-party payors. Third-party payors include government
authorities, managed care providers, private health insurers and
other organizations. The process for determining whether a payor
will provide coverage for a drug product may be separate from the
process for setting the reimbursement rate that the payor will pay
for the drug product. Third-party payors may limit coverage to
specific drug products on an approved list, or formulary, which
might not include all of the FDA-approved drugs for a particular
indication. A decision by a third-party payor not to cover our
products, if approved, could reduce physician utilization of our
products once approved and have a material adverse effect on our
sales, results of operations and financial condition. Moreover, a
payor’s decision to provide coverage for a drug product does not
imply that an adequate reimbursement rate will be approved.
Adequate third-party reimbursement may not be available to enable
us to maintain price levels sufficient to realize an appropriate
return on our investment in product development.
In addition, the U.S.
government, state legislatures and foreign governments have
continued implementing cost-containment programs, including price
controls, restrictions on coverage and reimbursement and
requirements for substitution of generic products. By way of
example, in the United States, the ACA contains provisions that may
reduce the profitability of drug products, including, for example,
increased rebates for drugs sold to Medicaid programs, extension of
Medicaid rebates to Medicaid managed care plans, mandatory
discounts for certain Medicare Part D beneficiaries, and annual
fees based on pharmaceutical companies’ share of sales to federal
health care programs. In addition, recently there has been
heightened governmental scrutiny over the manner in which
manufacturers set prices for their marketed products, which has
resulted in several Congressional inquiries and proposed bills
designed to, among other things, reform government program
reimbursement methodologies. We expect that additional state and
federal healthcare reform measures will be adopted in the future,
any of which could limit the amounts that federal and state
governments will pay for healthcare products and services, which
could result in reduced demand for our products once approved or
additional pricing pressures.
We expect that the Trump
administration will continue to seek to modify, repeal, or
otherwise invalidate all, or certain provisions of, the ACA. In
January 2017, the House and Senate passed a budget resolution that
authorizes congressional committees to draft legislation to repeal
all or portions of the ACA and permits such legislation to pass
with a majority vote in the Senate. President Trump has also
recently issued an executive order in which he stated that it is
his administration’s policy to seek the prompt repeal of the ACA
and directed executive departments and federal agencies to waive,
defer, grant exemptions from, or delay the implementation of the
burdensome provisions of the ACA to the maximum extent permitted by
law. There is still uncertainty with respect to the impact
President Trump’s administration and the U.S. Congress may have, if
any, and any changes will likely take time to unfold, and could
have an impact on coverage and reimbursement for healthcare items
and services covered by plans that were authorized by the ACA. As
such, we cannot predict what effect the ACA or other healthcare
reform initiatives that may be adopted in the future will have on
our business.
Foreign
Regulation
In order to market any
product outside of the United States, we must comply with numerous
and varying regulatory requirements of other countries regarding
safety and efficacy and governing, among other things, clinical
trials and commercial sales and distribution of our products. While
our management and many of our consultants are familiar with and
have been responsible for gaining marketing approval in many
countries, we have not reviewed the specific regulations in
countries outside of the United States, as it pertains to
cannabinoids.
Additional
Regulation
We are a reporting
company with the Securities and Exchange Commission (the “SEC”),
and, therefore, subject to the information and reporting
requirements of the Exchange Act of 1934, as amended (the “Exchange
Act”) and other federal securities laws, and the compliance
obligations of the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley
Act”). In addition, our financial reporting is subject to United
States generally accepted accounting principles (“U.S. GAAP”), and
U.S. GAAP is subject to change over time.
We are also subject to
federal, state and local laws and regulations applied to businesses
generally. We believe that we are in conformity with all applicable
laws in all relevant jurisdictions.
Employees
As of the date of this
prospectus, we have a total of four full-time employees, two of
whom have an M.D. degree. None of our employees are represented by
a labor union or covered by a collective bargaining agreement. We
have not experienced any work stoppages and we consider our
relations with our employees to be good.
We anticipate that we
will need to hire approximately four additional employees or
independent contractors for our continued development efforts. We
also intend to utilize independent contractors and outsourced
services, such as CRO’s, and third-party manufacturers, where
possible and appropriate.
Website
Our Internet website,
which is located at http://emeraldbio.life, describes our company
and our management and provides information about cannabis-based
therapeutics. Information contained on our website is not
incorporated by reference into, and should not be considered a part
of, this prospectus.
DESCRIPTION OF
PROPERTY
Principal
Offices
Our principal executive
offices and corporate offices are located at 130 North Marina
Drive, Long Beach, CA 90803.
Our laboratory and
office space previously consisted of approximately 3,415 square
feet located at the Innovation Hub, Insight Park on the UM campus.
Our lease expired on December 31, 2017 and our annual rent was
approximately $111,000, payable in equal monthly installments with
annual escalations. Upon expiration, the Company did not renew the
laboratory lease. The Company has retained office space in Long
Beach, California under lease agreement at the rate of $2,609 per
month and in Oxford, Mississippi at the rate of $300 per month.
LEGAL PROCEEDINGS
On May 3, 2017, the
Company entered into a securities purchase agreement with a
purchaser to sell 1,000,000 shares of a new Series E Preferred
Stock, par value $0.001 per share, at a purchase price of $20.00
for each preferred share for aggregate gross proceeds of
$20,000,000 (the “Series E Preferred Stock Financing”). The
securities purchase agreement provides for no conditions precedent
to the close and that closing is not to occur later than July 10,
2017. The purchaser did not provide funding to close the
transaction on July 10, 2017 as required under the securities
purchase agreement and requested an extension of the closing date.
In connection with the signing of the securities purchase
agreement, an affiliate of the purchaser entered into a financial
guarantee to the benefit of the Company that provided for payment
of the purchase price in full within 90 days of exercise. The
Company exercised this guarantee on July 12, 2017. The guarantor
has failed to pay the $20,000,000 within 90 days of notice of the
purchaser’s default, as required by the terms of the guaranty.
On November 8, 2017, the
Company filed a petition commencing arbitration against the
purchaser and guarantor as well as other related individuals. In
the petition, the Company asserts, among other things, breach of
contract against the purchaser for its failure to close its
purchase of Series E Preferred Stock as required by the securities
purchase agreement. The Company also asserts a breach of contract
claim against the guarantor for its failure to honor its guarantee
of the transaction. The petition was filed with Judicial
Arbitration and Mediation Services, Inc., ENDISPUTE in Orange
County, California, as required by the securities purchase
agreement. The Company engaged a legal counsel in the matter on a
contingent-fee basis, other than costs, but that firm has
subsequently decided to not proceed with the case. The Company is
currently assessing its intent to continue to pursue damages and
remedies in connection with these agreements.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Market Information. Our common stock has been quoted on the
OTCQB, under the symbol “EMBI”. Previously, it traded under the
symbol “NMUS” until March 25, 2019. There can be infrequent trading
volume, which precipitates wide spreads in the “bid” and “ask”
quotes of our common stock, on any given day. On February 6, 2020,
the last reported sale price of our common stock on the OTCQB was $
0.16 per share.
The
following table sets forth, for the quarters indicated, the high
and low bid prices per share of our common stock on the OTCQB,
reported by the Financial Industry Regulatory Authority Composite
Feed or other qualified interdealer quotation medium. Such
quotations reflect inter-dealer prices, without retail mark-up,
mark-down or commission, and may not represent actual
transactions.
|
Quarter Ended
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High
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|
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Low
|
|
|
January 1, 2020 through
February 6, 2020
|
|
$ |
0.20 |
|
|
$ |
0.12 |
|
|
December 31, 2019
|
|
$ |
0.49 |
|
|
$ |
0.16 |
|
|
September 30, 2019
|
|
$ |
0.45 |
|
|
$ |
0.25 |
|
|
June 30, 2019
|
|
$ |
1.17 |
|
|
$ |
0.28 |
|
|
March 31, 2019
|
|
$ |
0.90 |
|
|
$ |
0.30 |
|
|
December 31, 2018
|
|
$ |
0.60 |
|
|
$ |
0.05 |
|
|
September 30, 2018
|
|
$ |
0.39 |
|
|
$ |
0.18 |
|
|
June 30, 2018
|
|
$ |
0.34 |
|
|
$ |
0.22 |
|
|
March 31, 2018
|
|
$ |
0.48 |
|
|
$ |
0.14 |
|
|
December 31, 2017
|
|
$ |
0.30 |
|
|
$ |
0.10 |
|
|
September 30, 2017
|
|
$ |
0.32 |
|
|
$ |
0.23 |
|
|
June 30, 2017
|
|
$ |
0.38 |
|
|
$ |
0.25 |
|
|
March 31, 2017
|
|
$ |
0.50 |
|
|
$ |
0.24 |
|
Holders. As
of February 6, 2019, there were approximately 59 stockholders of
record. The number of stockholders of record does not include
beneficial owners of our common stock, whose shares are held in the
names of various dealers, clearing agencies, banks, brokers and
other fiduciaries.
Dividends. We have
never declared or paid a cash dividend on our common stock. We do
not expect to pay cash dividends on our common stock in the
foreseeable future. We currently intend to retain our earnings, if
any, for use in our business. Any dividends declared in the future
will be at the discretion of our Board and subject to any
restrictions that may be imposed by our lenders.
Penny Stock
Regulation. Shares of our common stock will probably be subject
to rules adopted by the SEC that regulate broker-dealer practices
in connection with transactions in “penny stocks.” Penny stocks are
generally equity securities with a price of less than $5.00 (other
than securities registered on certain national securities exchanges
or quoted on the NASDAQ system, provided that current price and
volume information with respect to transactions in those securities
is provided by the exchange or system). The penny stock rules
require a broker-dealer, prior to a transaction in a penny stock
not otherwise exempt from those rules, deliver a standardized risk
disclosure document prepared by the SEC, which contains the
following:
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·
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a description of the nature
and level of risk in the market for penny stocks in both public
offerings and secondary trading;
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·
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a description of the
broker’s or dealer’s duties to the customer and of the rights and
remedies available to the customer with respect to violation to
such duties or other requirements of securities’ laws;
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·
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a brief, clear, narrative
description of a dealer market, including “bid” and “ask” prices
for penny stocks and the significance of the spread between the
“bid” and “ask” price;
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·
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a toll-free telephone number
for inquiries on disciplinary actions;
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·
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definitions of significant
terms in the disclosure document or in the conduct of trading in
penny stocks; and
|
|
|
·
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such other information and
is in such form (including language, type, size and format), as the
SEC shall require by rule or regulation.
|
Prior to effecting any
transaction in penny stock, the broker-dealer also must provide the
customer the following:
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|
·
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the bid and offer quotations
for the penny stock;
|
|
|
·
|
the compensation of the
broker-dealer and its salesperson in the transaction;
|
|
|
·
|
the number of shares to
which such bid and ask prices apply, or other comparable
information relating to the depth and liquidity of the market for
such stock; and
|
|
|
·
|
monthly account statements
showing the market value of each penny stock held in the customer’s
account.
|
In addition, the penny stock
rules require that prior to a transaction in a penny stock not
otherwise exempt from those rules, the broker-dealer must make a
special written determination that the penny stock is a suitable
investment for the purchaser and receive the purchaser’s written
acknowledgment of the receipt of a risk disclosure statement, a
written agreement to transactions involving penny stocks, and a
signed and dated copy of a written suitability statement. These
disclosure requirements may have the effect of reducing the trading
activity in the secondary market for a stock that becomes subject
to the penny stock rules. Holders of shares of our common stock may
have difficulty selling those shares because our common stock will
probably be subject to the penny stock rules.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The
following discussion and analysis of our financial condition and
results of operations should be read in conjunction with our
financial statements for the three and nine months ended September
30, 2019 and 2018 (unaudited) and the year ended December 31, 2018
together with notes thereto. In addition to historical information,
this discussion and analysis contains forward-looking statements
that involve risks, uncertainties and assumptions. Our actual
results may differ materially from those anticipated in these
forward-looking statements as a result of certain factors,
including, but not limited, to those set forth under “Risk Factors”
and elsewhere in this prospectus.
Unless otherwise provided in this prospectus, references to
“we,” “us,” “our” and “Emerald Bioscience” in this discussion and
analysis refer to Emerald Bioscience, Inc., a Nevada corporation
formerly known as Nemus Bioscience, Inc. and Load Guard Logistics,
Inc., together with its wholly-owned subsidiaries, Nemus, a
California corporation, and EMBI Australia Pty Ltd., an Australian
proprietary limited company.
Overview
We are a biopharmaceutical
company targeting the discovery, development, and the
commercialization of cannabinoid-based therapeutics, through a
number of license agreements with the University of Mississippi
(“UM”). UM holds the only contract to cultivate cannabis for
research purposes on behalf of the Federal Government of the United
States since 1968, and it has significant expertise in cannabis
cultivation and the extraction, separation, process and manufacture
of cannabis extracts as well as the chemistry and physiology of
cannabinoid molecules. We strive to serve as UM’s partner for the
development and commercialization of cannabinoid-based
therapeutics, and the realization of this partnership will depend
on the successful development of these compounds through the
regulatory requirements of drug approval agencies, like the FDA in
the United States and the EMA in the European Union.
Effective March 25, 2019, we
changed the Company’s name from Nemus Bioscience, Inc. to Emerald
Bioscience, Inc.
In August 2019, we formed a
new subsidiary in Australia, EMBI Australia, in order to qualify
for the Australian government’s research and development tax credit
for research and development dollars spent in Australia. The
primary purpose of EMBI Australia is to conduct clinical trials for
our product candidates.
Recent Events and
Significant Contracts.
Expansion of UM 5050 and
UM 8930 Licenses from Ocular Delivery Only to All Fields of
Use
On May 24, 2019, we executed
two restated and amended license agreements with UM which expanded
our use of UM 5050, a pro-drug of tetrahydrocannabinol (“THC”), and
UM 8930, an analog of cannabidiol (“CBD”), from ocular delivery
only to all fields of use. Pursuant to these license agreements, we
have exclusive, perpetual, worldwide licenses related to UM 5050
and UM 8930. Additionally, with the prior written consent of UM, we
have the right to sublicense the licensed intellectual
property.
The all fields use for
tetrahydrocannabinol-valine-hemisuccinate (“THCVHS”), the
proprietary prodrug of THC, is expected to allow the Company to
explore related uses for the active moiety of the prodrug, namely
THC. Independent in vitro and in vivo studies have
demonstrated the potential use of THC in a variety of potential
indications based on the ability of the cannabinoid to act as an
anti-inflammatory, anti-fibrotic, and/or inhibitor of
neovascularization. The Company has generated data related to these
effects using an ex vivo human tissue model of the eye. The
prodrug technology employed in THCVHS is designed to enhance the
bioavailability and pharmacokinetic predictability of the active
part of the molecule, once introduced into the body through routes
of administration currently being considered by the development
team. Given the positive data accumulated to date in studies of the
eye, the Company could explore additional central nervous system
applications for THCVHS. The Company expects to develop strategic
collaborations to identify and advance these applications.
The all fields use of
cannabidiol-valine-hemisuccinate (“CBDVHS”), the analog of CBD, is
expected to permit the Company to expand research and development
into organ systems outside of the current ocular space. Potential
disease targets over time could involve the central nervous system,
the gastrointestinal tract, the endocrine/metabolic system,
reproductive system diseases, or as yet unrecognized opportunities.
This bioengineered version of CBD is expected to enlarge the
disease target pool by virtue of new routes of administration into
the body, thereby enhancing bioavailability. The determination by
the DEA that CBDVHS is not a controlled substance permits the
Company to enlarge the potential pool of clinical test sites and a
more diverse patient pool in the study of disease. The Company
expects to develop strategic collaborations to identify and advance
these applications.
NB1111
We continue to advance our
lead drug candidate, NB1111, towards first-in-human studies to be
conducted in both normal controls and patients with glaucoma or
ocular hypertension (the “Clinical Trial”). We anticipate launching
the Clinical Trial in the second half of 2020 in Australia. During
the first nine months in 2019, we achieved various milestones
related to the research and development of NB1111, including the
following:
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|
·
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In August 2019, EMBI
Australia Pty Ltd entered into a start-up agreement with Novotech
(Australia) Pty Limited (“Novotech”). The start-up agreement is
being entered into in connection with the launch of the Clinical
Trial. The Company expects to pay approximately $45,000 in
professional fees and pass through costs in connection with the
services provided for in the start-up agreement. Additionally, on
September 26, 2019, EMBI Australia Pty Ltd and Novotech executed a
Master Services Agreement and anticipate entering into project
agreements covering all anticipated services to be provided by
Novotech to the Company in connection with the Clinical Trial.
|
|
|
|
|
|
·
|
In August 2019, EMBI
Australia entered into a master service agreement and initial
statement of work with Agilex Biolabs Pty Ltd (“Agilex”), pursuant
to which Agilex would assist with the assay set up for the
anticipated Clinical Trial.
|
|
|
·
|
In August 2019, we executed
an agreement with Bioscience Laboratories, Inc. to complete Draize
testing in advance of the anticipated Clinical Trial.
|
|
|
|
|
|
·
|
Albany Molecular Research
Inc. (“AMRI”) worked toward closing the synthesis validation
pathway to manufacture cGMP API of THCVHS with validation of drug
product purity. In turn, on April 30, 2019, we entered into an
additional agreement with AMRI related to non-GMP synthesis of a
demonstration batch of our pro-drug of THC. In August 2019, our
manufacturing agreement with AMRI for THCVHS that was executed in
July 2018 was replaced by the agreement with Noramco discussed
below.
|
|
|
|
|
|
·
|
On August 7, 2019, we
entered into a first amendment to its agreement with Noramco to
manufacture THCVHS (the “Noramco Agreement”, as amended from time
to time). CBDVHS was being manufactured pursuant to the Noramco
Agreement prior to the amendment. We paid $257,800 upfront to add
the manufacture of THCVHS to the Noramco Agreement and additional
payments will be made upon Noramco’s shipping of the GMP active
pharmaceutical ingredient to us. All other material terms of the
Noramco Agreement remain the same.
|
|
|
|
|
|
·
|
In January 2019, we engaged
RRD International, LLC (“RRD”) to provide strategic ophthalmic
505(b)(2) regulatory planning, prepare a Pre-IND meeting briefing
book, and schedule and represent us at the Pre-IND meeting with the
FDA. In May 2019, we executed a change order to extend our work
with RRD as we continue to progress toward our Pre-IND meeting. In
August 2019, we executed an additional work order with RRD to
assist us in preparing an investigator’s brochure to support the
Clinical Trial.
|
|
|
|
|
|
·
|
UM completed experiments
showing that NB1111 was statistically superior in lowering
intraocular pressure (“IOP”) compared to the prostaglandin-based
therapy, latanoprost, the current standard-of-care for treating
glaucoma. Significance was reached across multiple timepoints
during a seven-day course of dosing using a validated rabbit
normotensive ocular model and NB1111 exerted pharmacologic activity
consistent with twice-daily dosing.
|
|
|
|
|
|
·
|
Glauconix Biosciences Inc.
(“Glauconix”) completed their pilot study to research the mechanism
of action and IOP-lowering ability of THC when administered into an
ex vivo model of a 3D-human trabecular meshwork using both
healthy and glaucomatous-derived tissues. The Glauconix study
validated the mechanism of action of NB1111 in lowering IOP, a
defining disease process of hypertensive glaucoma. Additionally,
biomarkers associated with inflammation and fibrosis in both normal
and tissues affected by glaucoma were significantly decreased,
pointing to anti-inflammatory and anti-fibrotic activities that are
often associated with the cannabinoid class of molecules in other
disease-states. Additionally, data revealed that biomarkers
associated with neovascularization, a disease process of new blood
vessel formation that can damage the retina in a variety of ocular
diseases, was also inhibited by THC, prompting further study for
the utility of this drug in diseases of the retina.
|
|
|
|
|
|
·
|
In January 2019, we executed
an agreement with Pharmaceuticals International, Inc. (“PII”) to
conduct studies to determine options for producing a sterile dosage
form which can be dosed in humans in a clinical study. PII will
conduct appropriate formulation studies to determine storage and
processing options. Pursuant to the terms of the agreement, we paid
$72,500 to initiate the project. After the initial evaluation, we
have agreed to pay additional fees and expenses upon completion of
certain milestones.
|
NB2222
NB2222 is the ocular
formulation of our proprietary CBD analog. We have embarked on
studies with UM exploring the utility of our drug candidate NB2222
as an eye drop nanoemulsion for the potential treatment and
management of several eye diseases, including but not limited to,
uveitis, dry eye syndrome, macular degeneration and diabetic
retinopathy.
In July 2019, we engaged
Glauconix to conduct research as to whether CBD or CBDVHS is
associated with an increase in IOP and, if so, what the potential
mechanism of action would be by exposing the 3D-human trabecular
meshwork tissue constructs to these molecules. The Company paid
$69,000 upfront and expects to pay Glauconix an additional $60,000
upon the completion of this study.
Additionally, in the second
quarter of 2019, UM also completed pre-clinical experiments showing
that NB2222 exhibited an ability to penetrate multiple chambers of
the eye and reach the optic nerve. These findings support the
therapeutic potential to provide ocular neuroprotection of retinal
ganglion cells, an important goal in treating diseases which lead
to vision loss. The data were published in the peer-reviewed
Journal of Ocular Pharmacology and Therapeutics in a paper titled,
“Analog Derivatization of Cannabidiol for Improved Ocular
Permeation” (2019; volume 35 (5): 1-10).
In February 2019, we entered
into the Noramco Agreement to provide manufacturing and product
development services for our analog formulation of CBD. The Company
paid $146,386 upfront and additional payments will be made upon
Noramco’s shipping of the active pharmaceutical ingredient to
us.
NB3111
NB3111 is a proprietary
cannabinoid cocktail currently undergoing testing as an
anti-infective agent against multiple strains of antibiotic
resistant bacteria, particularly methicillin-resistant
Staphylococcus aureus (“MRSA”). These studies look to examine the
utility of cannabinoid-based therapies against a variety of MRSA
strains and other gram-positive bacterial infections. We plan to
continue to present data from these studies at an upcoming
peer-reviewed scientific meeting focused on infectious
diseases.
Other Development
Programs
The Company plans to
continue to work with UM to explore other potential indications and
associated routes of administration to expand the UM5050 and UM
8930 licenses. The Company’s decision to advance a potential
therapeutic candidate will be influenced by a number of criteria,
including but not limited to, pre-clinical data, synthesis and
formulation capability as well as prevailing market conditions.
In July 2019, the Company
engaged StemoniX to evaluate CBD and CBDVHS (and possibly
additional CBD-derivatives) in a human in vitro neural model with
an application to epilepsy. The series of experiments are designed
to provide insight into how these cannabinoids stabilize neuronal
cells.
Critical Accounting
Policy and Estimates.
Our Management’s Discussion
and Analysis of Financial Condition and Results of Operations
section discusses our financial statements, which have been
prepared in accordance with accounting principles generally
accepted in the United States of America. The preparation of these
financial statements requires management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the
reported amounts of income and expenses during the reporting
period. On an on-going basis, management evaluates its estimates
and judgments, including those related to accrued expenses,
financing operations, and contingencies and litigation. Management
bases its estimates and judgments on historical experience and on
various other factors that are believed to be reasonable under the
circumstances, the results of which form the basis for making
judgments about the carrying value of assets and liabilities that
are not readily apparent from other sources. Actual results may
differ from these estimates under different assumptions or
conditions. The most significant accounting estimates inherent in
the preparation of our financial statements include estimates as to
the appropriate carrying value of certain assets and liabilities
which are not readily apparent from other sources. We consider
certain accounting policies related to fair value measurements,
convertible instruments, warrants issued in connection with
financings, stock-based compensation expense, and earnings per
share to be critical accounting policies that require the use of
significant judgments and estimates relating to matters that are
inherently uncertain and may result in materially different results
under different assumptions and conditions.
Management assessed the
critical accounting policies as disclosed in our Annual Report on
Form 10-K for the year ended December 31, 2018 and determined that
there were no changes to our critical accounting policies and
estimates during the three and nine months ended September 30,
2019.
Recently Issued and
Adopted Accounting Pronouncements
See Note 2 to the
accompanying condensed consolidated financial statements included
in this prospectus for information on recently issued accounting
pronouncements and recently adopted accounting pronouncements.
While we expect certain recently adopted accounting pronouncements
to impact our estimates in future periods, the impact upon adoption
was not significant to our current estimates and operations.
Results of
Operations
For the three months
ended September 30, 2019 and 2018
Revenues. To date, we
have not generated any revenues, and do not expect to generate any
revenue from the sale of products in the near future.
Operating expenses.
For the three months ended September 30, 2019, our total operating
expenses were $1,503,114 as compared to $1,045,620 for the three
months ended September 30, 2018. The increase in operating expenses
was due to the items noted below:
Research and
development. Research and development expenses for the three
months ended September 30, 2019 were $513,004, which consisted of
expenses including salaries and benefits and consulting fees for
the staff involved in our preclinical and clinical drug development
activities, contract research and development fees paid to
Glauconix, StemoniX and Bioscience Laboratories, regulatory
consulting fees paid to RRD, fees related to contract manufacturing
paid to Noramco, fees related to contract formulation work paid to
PII and fees paid to Novotech and Agilex in preparation of the
Clinical Trial expected to launch in the second half of 2020.
Research and development expenses for the three months ended
September 30, 2018 were $67,291, which consisted of the annual
license maintenance fee for UM5050 related to ocular delivery,
contract research and development fees with UM, and fees related to
our contract with AMRI to manufacture our prodrug of THC.
General and
administrative. General and administrative expenses for the
three months ended September 30, 2019 were $990,110, which
primarily consisted of salaries, stock compensation expense,
general legal and patent related fees, consulting fees and
professional fees related to the Company’s capital raising efforts
and regulatory filings. By comparison, general and administrative
expenses for the three months ended September 30, 2018 were
$978,329, which primarily consisted of the same components. General
and administrative expenses remained relatively constant period
over period.
Other expense
(income). For the three months ended September 30, 2019, the
Company had other expense of $3,428,011 related primarily to the
increase in the fair value of our derivative liabilities by
$3,126,464 which was driven by the increase in our stock price. We
also realized additional interest expense for the three months
ended September 30, 2019 as compared to the three months ended
September 30, 2018 due to the amortization of the debt discount and
interest payments associated with the outstanding balance under the
Credit Agreement which was entered during the fourth quarter of
2018.
For the three months ended
September 30, 2018, the Company had other expense of $1,050,729
which consisted of the change in fair value of derivative
liabilities driven by an increase in our stock during that
period.
Net loss and
comprehensive loss. For the three months ended September 30,
2019, we had net loss of $4,931,125 as compared to a net loss of
$2,096,349 for the three months ended September 30, 2018. The
change was primarily attributable to increases in research and
development expenses and other expenses. We expect to incur net
losses for the foreseeable future.
For the nine months
ended September 30, 2019 and 2018
Revenues. To date, we
have not generated any revenues, and do not expect to generate any
revenue from the sale of products in the near future.
Operating expenses.
For the nine months ended September 30, 2019, our total operating
expenses were $4,789,068 as compared to $3,377,171 for the nine
months ended September 30, 2018. The increase in operating expenses
was due to the items noted below:
Research and
development. Research and development expenses for the nine
months ended September 30, 2019 were $1,522,031, which consisted of
the upfront payments for the all fields of use licenses for UM 5050
and UM 8930, the annual license maintenance fee for UM 5070,
salaries and benefits and consulting fees for the staff involved in
our preclinical and clinical drug development activities, contract
research and development fees paid to UM, Glauconix, StemoniX and
Bioscience Laboratories, regulatory consulting fees paid to RRD,
fees related to contract manufacturing paid to AMRI, Noramco and
ElSohly Laboratories, fees related to contract formulation work
paid to PII and fees paid to Novotech and Agilex in preparation of
the Clinical Trial expected to launch in the second half of
2020.
Research and development
expenses for the nine months ended September 30, 2018 were $92,291
which consisted of the annual license maintenance fees for UM5050
related to ocular delivery and for UM 5070, contract research and
development fees with UM, and fees related to our contract with
AMRI to manufacture our prodrug of THC.
For the nine months ended
September 30, 2019, research and development expenses increased by
$1,429,740, as compared to the nine months ended September 30,
2018. The increase is primarily due to upfront payments for the all
fields of use licenses for UM 5050 and UM 8930, contract
manufacturing expenses, contract formulation expenses, regulatory
fees, salaries and benefits and consulting fees for the staff
involved in our preclinical and clinical drug development
activities and contract research and development expenses, as the
procurement of the Credit Agreement has allowed us to continue to
focus on ramping up our research and development efforts.
General and
administrative. General and administrative expenses for the
nine months ended September 30, 2019 were $3,267,037, which
primarily consisted of salaries, stock compensation expense,
general legal and patent related fees, consulting fees and
professional fees related to the Company’s capital raising efforts
and regulatory filings. By comparison, general and administrative
expenses for the nine months ended September 30, 2018 were
$3,284,880, which primarily consisted of the same components.
General and administrative expenses remained relatively constant
period over period.
Other expense
(income). For the nine months ended September 30, 2019, the
Company had other income of $990,441 related primarily to the
decrease in fair value of our derivative liabilities which was
driven by the decrease in our stock price. In addition, we
initiated drawdowns under the Credit Agreement which required us to
bifurcate compound embedded derivatives and record an additional
charge for the fair value of such instruments in excess of
proceeds. We also realized additional interest expense for the nine
months ended September 30, 2019 as compared to the nine months
ended September 30, 2018 due to the amortization of the debt
discount and interest payments associated with the outstanding
balance under the Credit Agreement which was entered during the
fourth quarter of 2018.
For the nine months ended
September 30, 2018, the Company had other expense of $9,593,329
which consisted of the following primary components:
|
|
·
|
$1,653,477 represented a net
increase in fair value of our derivative liabilities for the
nine-month period ended September 30, 2018.
|
|
|
·
|
$7,174,634 represented a
loss from the excess of the fair value of the warrants on the date
of issuance over the proceeds received in the Emerald Financing
transaction.
|
|
|
·
|
We recognized $590,392 and
$34,608 from a loss on extinguishment and amortization of the
discount, respectively, related to the Convertible debt – related
party
|
|
|
·
|
$137,192 in financing costs
related to the Emerald Financing transaction.
|
Net loss and
comprehensive loss. For the nine months ended September 30,
2019, we had net loss of $3,800,227 as compared to a net loss of
$12,972,142 for the nine months ended September 30, 2018. The
decrease in the net loss was primarily attributable to an increase
in other income which was offset by an increase in research and
development expenses. We expect to incur net losses for the
foreseeable future.
For the years ended
December 31, 2018 and 2017
Revenues. To date, we
have not generated any revenues, and do not expect to generate any
revenue from the sale of products in the near future.
Operating expenses.
For the year ended December 31, 2018, our total operating expenses
were $4,692,523 as compared to $3,859,229 for the year ended
December 31, 2017. The increase in operating expenses was due to
the items noted below.
Research and
development. Research and development expenses for the year
ended December 31, 2018 were $329,966, which consisted of the
annual license maintenance fees for UM 5070, annual license
maintenance fees for UM 5050 related to ocular delivery, annual
license maintenance fees for UM 8930 related to ocular delivery,
contract research and development fees and fees related to our
contract with AMRI to manufacture our prodrug of THC. Research and
development expenses for the year ended December 31, 2017 were
$311,302, which consisted of consisted of a one-time upfront
payment for UM 5070, as well as annual license maintenance fees for
UM 5050 related to ocular, oral and rectal delivery, annual license
maintenance fees for UM 8930 related to ocular and rectal delivery,
option agreement renewal fees with UM and contract research and
development fees.
General and
administrative. General and administrative expenses for the
year ended December 31, 2018 were $4,362,557, which primarily
consisted of salaries, consulting fees, stock-based compensation
expense and professional fees associated with our costs of being a
public company. Our general and administrative expenses for the
year ended December 31, 2017 were $3,547,927 and were comprised of
the same components. The increase in general and administrative
expenses for the year ended December 31, 2018 as compared to the
year ended December 31, 2017 relates primarily to higher consulting
fees associated with the Emerald Health Sciences consulting
contract, audit fees, accounting consulting fees and the costs
associated with the changeover in management.
Other income and
expenses. For the year ended December 31, 2018, the Company had
non-operating expense of approximately $14,500,000, which was
comprised primarily of the following:
|
|
1)
|
$6,503,174 of other expense
from the change in fair value of derivative liabilities which
represents an overall increase in the fair value of our derivative
liabilities. The derivatives marked-to-market include the
conversion liabilities related to the Series B Preferred Stock and
Secured Convertible Promissory Note – related party, the Series B
and Emerald Health Sciences warrant liabilities and the compound
derivative bifurcated from the Credit Agreement (defined below). A
number of assumptions go into the third-party valuations for each
of these instruments however the increase in our stock price,
update to our volatility assumption and valuation assumptions were
all contributing factors to the increase in the value of these
instruments during the year ended December 31, 2018.
|
|
|
|
|
|
2)
|
$7,174,634 represented a
loss from the excess of the fair value of the warrants on the date
of issuance over the proceeds received in the Emerald Health
Sciences Financing (defined below).
|
|
|
|
|
|
3)
|
$137,192 in financing costs
related to the Emerald Health Sciences Financing.
|
|
|
|
|
|
4)
|
$590,392 from a loss on
extinguishment related to the Secured Convertible Promissory
Note.
|
|
|
|
|
|
5)
|
$94,763 from interest
expense which includes non-cash interest expense from the
amortization of the debt discounts and cash interest paid to debt
holders.
|
For the year ended December
31, 2017, the Company had non-operating income of $767,000, which
was comprised primarily of the following:
|
|
1)
|
$767,198 of other income
from the change in fair value of derivative liabilities which
represents an overall decrease in the change in the fair value of
our derivative liabilities. The derivatives marked-to-market
include the conversion liability related to the Series B Preferred
Stock, the put option right related to the Series F Preferred Stock
and the Series B warrant liability. A number of assumptions go into
the third-party valuations for each of these instruments however
the decrease in our stock price at year end was one of the
contributing factors to the decrease in the value of these
instruments during the year ended December 31, 2017.
|
Net Loss. For the
year ended December 31, 2018, we had a net loss of $19,194,236 as
compared to a net loss of $3,094,298 for the year ended December
31, 2017. We expect to incur net losses for the foreseeable
future.
Liquidity and Capital
Resources.
We have
incurred operating losses and negative cash flows from operations
since our inception and as of September 30, 2019, had an
accumulated deficit of $37,025,334, a stockholders’ deficit of
$16,402,461 and a working capital deficit of $12,540,955. We
anticipate that we will continue to incur net losses into the
foreseeable future in order to advance and develop several
potential drug candidates into preclinical and clinical development
activities and support our corporate infrastructure, which includes
the costs associated with being a public company. We had cash of
$1,319,360 as of September 30, 2019, as compared to $1,853,373 as
of December 31, 2018. During the nine months ended September 30,
2019, we received net cash proceeds of $3,990,699 from the Credit
Agreement with Emerald Health Sciences. The cash balance as of
September 30, 2019, including the cash balance as of December 31,
2018 and the net cash proceeds from the Credit Agreement, has been
offset by cash used in operating activities of $4,524,712 for the
nine months ended September 30, 2019. We had operating cash
outflows primarily due to the net loss from operations and a
non-cash adjustment to add back the gain from the change in the
fair value of derivative liabilities to our net loss. Without
additional funding, management believes that we will not have
enough funds to meet our obligations beyond one year after the date
the Condensed Consolidated Financial Statements are issued. These
conditions give rise to substantial doubt as to our ability to
continue as a going concern.
On
October 5, 2018, we secured a Credit Agreement with Emerald Health
Sciences, providing for a credit facility of up to $20,000,000 to
the Company. Under the Credit Agreement, we can draw up to
$20,000,000 in advances from Emerald Health Sciences from time to
time, each in a principal amount of at least $250,000. The advances
are subject to approval by our Board, which is controlled by the
directors and principal executive officer of Emerald Health
Sciences. As of September 30, 2019, we have effected three
drawdowns under the Credit Agreement, each in the amount of
$2,000,000, for an aggregate principal amount of $6,000,000 in
advances, and have issued to Emerald Health Sciences warrants to
purchase an aggregate of 7,500,000 shares of common stock at an
exercise price of $0.50 per share. On December 20, 2019, the
Company entered into an Warrant Exchange Agreement, pursuant to
which Emerald Health Sciences has exercised 40.80 million of such
warrants and paid the aggregate exercise price of approximately
$4.08 million for the related warrant shares in the form of a
reduction of the corresponding amount of obligations outstanding
under the Credit Agreement. Upon consummation of the transactions
under the Warrant Exchange Agreement, the total outstanding
principal amount excluding discounts under the Credit Agreement was
$2,014,500. We have the ability to continue borrowing under this
Credit Agreement, however there is no guarantee of continued
funding.
On
October 23, 2019, we filed a registration statement on Form S-1/A,
which has been declared effective as of October 28, 2019, and on
November 13, 2019, we filed a related registration statement) on a
Form S-1MEF that became effective under Rule 462(b). On November
21, 2019, we sold a portion of securities registered under the
foregoing registration statements under a securities purchase
agreement, as reported in the current report on the Form 8-K filed
with the SEC on November 21, 2019. Subject to market conditions, we
expect to continue the sale of securities under the foregoing
registration statements as soon as practicable. The specific terms
of the offering of such remaining securities under the registration
statements, if it occurs, will be established at the time of such
offering. We cannot assure you that this offering will result in
our raising additional capital on terms favorable to us or at
all.
We intend
to continue working toward identifying and obtaining new sources of
financing. No assurances can be given that we will be successful in
obtaining additional financing in the future. Any future financing
that we may obtain may cause significant dilution to existing
stockholders. Any debt financing or other financing of securities
senior to common stock that we can obtain will likely include
financial and other covenants that will restrict our flexibility.
Any failure to comply with these covenants would have a negative
impact on our business, prospects, financial condition, results of
operations and cash flows.
If
adequate funds are not available, we may be required to delay,
scale back or eliminate portions of our operations, cease
operations or obtain funds through arrangements with strategic
partners or others that may require us to relinquish rights to
certain of our assets. Accordingly, the inability to obtain such
financing could result in a significant loss of ownership and/or
control of our assets and could also adversely affect our ability
to fund our continued operations and our expansion efforts.
During
the next 12 months, we expect to incur significant research and
development expenses with respect to our products. The majority of
our research and development activity is focused on development of
potential drug candidates and preclinical trials.
We also
expect to incur significant legal and accounting costs in
connection with being a public company. We expect those fees will
be significant and will continue to impact our liquidity. Those
fees will be higher as our business volume and activity
increases.
We also
anticipate that we will need to hire additional employees or
independent contractors as the Company prepares to enter clinical
studies.
Going Concern
Our
independent registered public accounting firm has issued a report
on our audited financial statements for the fiscal year ended
December 31, 2018 that included an explanatory paragraph referring
to our recurring operating losses and expressing substantial doubt
in our ability to continue as a going concern. Our condensed
consolidated financial statements have been prepared on a going
concern basis, which assumes the realization of assets and
settlement of liabilities in the normal course of business. Our
ability to continue as a going concern is dependent upon our
ability to generate profitable operations in the future and/or to
obtain the necessary financing to meet our obligations and repay
our liabilities arising from normal business operations when they
become due. The outcome of these matters cannot be predicted with
any certainty at this time and raise substantial doubt that we will
be able to continue as a going concern. Our condensed consolidated
financial statements do not include any adjustments to the amount
and classification of assets and liabilities that may be necessary
should we be unable to continue as a going concern.
Off-Balance Sheet
Arrangements
There are
no off-balance sheet arrangements that have or are reasonably
likely to have a current or future effect on our financial
condition, changes in financial condition, revenues or expenses,
results of operations, liquidity, capital expenditures or capital
resources that is material to investors.
MANAGEMENT
The following table sets
forth certain information as of the date of this prospectus, with
respect to our directors, executive officers and significant
employees.
|
Name
|
|
Age
|
|
Position
|
|
Dr. Brian S. Murphy
|
|
62
|
|
Chief Executive Officer,
Director
|
|
Douglas Cesario
|
|
44
|
|
Chief Financial Officer
|
|
Dr. Dennis Kim
|
|
49
|
|
Chief Medical Officer
|
|
Punit Dhillon
|
|
39
|
|
Chairman, Director
|
|
Jim Heppell
|
|
63
|
|
Director
|
Biographies of Directors,
Executive Officers and Significant Employees
Dr. Brian S. Murphy.
Dr. Murphy was appointed as our Chief Executive Officer and as a
director in August 2015. Dr. Murphy was appointed as our Chief
Medical Officer in October 2014, and relinquished Chief Medical
Officer responsibilities when Dr. Kim was hired in August 2019. Dr.
Murphy was the Chief Medical Officer of Nemus Sub from August 2014
to October 2014. From 2009 to August 2014, Dr. Murphy served as the
Chief Medical Officer of Eiger Biopharmaceuticals. From 2003 to
2006, Dr. Murphy was Chief Medical Officer at Epiphany Biosciences.
From 2003 to 2006, Dr. Murphy was Chief Medical Officer at Valeant
Pharmaceuticals International (VRX) where his responsibilities also
included oversight of Global Medical Affairs and Pharmacovigilance.
Dr. Murphy also served as Medical Director, then Vice President of
Marketing and Commercial Strategy of Hepatology for InterMune, Inc.
(ITMN). From 2000 to 2002, Dr. Murphy was Medical Director of North
America for Antivirals/Interferons/Transplant at Hoffmann-LaRoche.
Prior to joining industry, Dr. Murphy was Assistant Professor of
Medicine at New York Medical College and was Director of the
Clinical Strategies Program at St. Vincent’s Hospital in New York
City, the lead hospital of the Catholic Healthcare Network of New
York. Dr. Murphy is board-certified in internal medicine and
completed his residency in internal medicine at Tufts-New England
Medical Center and served as Chief Medical Resident in the Boston
University program. Dr. Murphy completed parallel fellowship tracts
at Harvard Medical School, one in internal medicine/clinical
Epidemiology at the Massachusetts General Hospital and the other in
Medical Ethics addressing issues of distributive justice and access
to care at Brigham & Women’s Hospital. Dr. Murphy earned his
MD, MPH (general public health), and MS (pharmacology) degrees from
New York Medical College and is a graduate of the Harvard School of
Public Health (MPH in Health Policy and Management). He earned his
MBA at the Columbia University Graduate School of Business. In
making the decision to appoint Dr. Murphy to serve as a director,
the Board considered, in addition to the criteria referred to
above, his experience in the healthcare industry, current service
as our Chief Executive Officer and his comprehensive knowledge of
the Company, its business and operations.
Douglas Cesario. Mr.
Cesario was appointed as our Chief Financial Officer in 2018. Prior
to his appointment, Mr. Cesario served as Chief Financial Officer,
Orange County Service Area, of Kaiser Foundation Hospitals &
Health Plan since April 2016, and prior to that as Director of
Finance and as a Senior Management Consultant from November 2013.
From 2007 to 2012, Mr. Cesario was the founder of a real estate
investment and advisory company. Mr. Cesario previously served in
private equity, investment banking and commercial real estate roles
from 1997 through 2006. He earned his MBA from the UCLA Anderson
School of Management. Based on his cumulative and diverse financial
background, our Board believes Mr. Cesario has the requisite
knowledge and expertise to serve as the Chief Financial Officer of
the Company.
Dr. Dennis Kim. Dr.
Kim was appointed Chief Medical Officer in August 2019. He is a
physician biotechnology executive with specialty training in
endocrinology/metabolism spanning approximately 20 years of
drug/product development and corporate strategy experience in the
biotech and medical technology industries. Dr. Kim previously
served as Chief Medical Officer of Emerald Health Sciences, Inc.
Prior to that he was Chief Medical Officer at Zafgen, Inc. for over
7 years where he oversaw all aspects of clinical and medical
affairs in the field of diabetes, obesity, and rare
metabolic/genetic disorders. Prior to joining Zafgen, Dr. Kim held
multiple senior-level positions at Orexigen Therapeutics (Sr. VP of
Medical and Clinical Affairs), EnteroMedics (Chief Medical Officer)
and Amylin Pharmaceuticals (Exec Director of Corporate Strategy).
He holds an MD from the University of Health Sciences, The Chicago
Medical School, an MBA from UCSD Rady School of Management and a
B.S. in biology from the University of California at Los Angeles.
His endocrinology/metabolism specialty fellowship training was
completed at UCSD School of Medicine.
Punit Dhillon. Mr.
Dhillon was appointed as a member of our Board in connection with
the consummation of the investment in the Company by Emerald Health
Sciences in 2018. On December 17, 2019, Mr. Dhillon was appointed
as Chairman of our Board. Mr. Dhillon is currently a board member
of Emerald Health Sciences, Inc., Emerald Health Therapeutics, Inc.
(EMH), a TSX Venture Exchange listed company, and Arch Therapeutics
Inc (OTCQB). Mr. Dhillon is a Co-founder and Director of OncoSec
Medical Incorporated (NASDAQ: ONCS) and was formerly the CEO
through March 2018. Prior to OncoSec, Mr. Dhillon was the Vice
President of Finance and Operations at Inovio Pharmaceuticals, Inc.
(NASDAQ: INO) from September 2003 until March 2011. Mr. Dhillon has
also previously been a consultant and board member for several TSX
Venture Exchange listed early stage life science companies, which
matured through advances in their development pipelines and
subsequent M&A transactions. Prior to joining Inovio, Mr.
Dhillon worked for a corporate finance law firm as a law clerk and
worked with MDS Capital Corp. (now Lumira Capital Corp.). Mr.
Dhillon is an active member in his community and places great value
on helping future leaders overcome challenges through mentorship
and education and is a co-founder and board member of Young
Entrepreneurship Leadership Launchpad (YELL), a not-for-profit and
charity organization based in Canada. Mr. Dhillon has a Bachelor of
Arts with honors in Political Science and a minor in Business
Administration from Simon Fraser University. Mr. Dhillon’s
experience in the biotechnology and pharmaceutical industry, and
his experience with publicly traded companies were the primary
qualifications that the Board considered in appointing him as a
director of the Company.
Jim Heppell. Mr.
Heppell was the founder, CEO and director of BC Advantage Life
Sciences I Fund, which won the Canadian Venture Capital Deal of the
Year Award in 2006 for having the highest realized return (23.4x
its investment in Aspreva Pharmaceuticals) of any venture capital
fund in Canada. Mr. Heppell has a Bachelor of Science degree in
Microbiology and a law degree from the University of British
Columbia. After being called to the Bar, he worked for six years
with Fasken Martineau DuMoulin, during which time he was seconded
to the BC Securities Commission for six months. Mr. Heppell then
became President and Chief Executive Officer of Catalyst Corporate
Finance Lawyers, a boutique corporate finance law firm that focused
on assisting life science and technology companies. He is a past
member of the Securities Policy Advisory Committee to the BCSC and
is a Past-Chairman of the Securities Section of the Canadian Bar
Association (B.C. Branch). Mr. Heppell is currently a director of a
number of public and private life science companies, including
Emerald Health Sciences. The Board considered Mr. Heppell’s
significant experience with life science and technology companies
in making the decision to appoint him as a director of the
Company.
Section 16(a) Beneficial
Ownership Reporting Compliance
Section 16(a) of the
Exchange Act requires our directors, executive officers, and any
persons who own more than 10% of a registered class of our equity
securities, to file reports of ownership and changes in ownership
with the SEC. SEC regulation requires executive officers, directors
and greater than 10% stockholders to furnish us with copies of all
Section 16(a) forms they file. Based solely on our review of the
copies of such forms received by us, or written representations
from certain reporting persons, we believe that during the year
ended December 31, 2018, our executive officers, directors, and
greater than 10% stockholders complied with all applicable filing
requirements.
Family
Relationships
There are no family
relationships among our directors or executive officers.
Term of Office of
Directors
Our directors are elected at
each annual meeting of stockholders and serve until the next annual
meeting of stockholders or until their successor has been duly
elected and qualified, or until their earlier death, resignation or
removal.
Directors and Officers
Involvement in Certain Legal Proceedings
During the past ten years,
our directors and executive officers have not been involved in any
of the legal proceedings set forth in Item 401(f) of Regulation S-K
promulgated by the SEC.
Board and Committee
Meetings
During 2018, our Board met
three times (including telephonic meetings) and took action by
written consent 11 times. Each director attended at least 75% of
the meetings held by the Board and by each committee on which he
served while he was a director, either in person or by
teleconference, during the year.
Director Attendance at
Annual Meetings
Although we do not have a
formal policy regarding attendance by members of our Board at each
annual meeting of stockholders, we encourage all of our directors
to attend.
Audit Committee and
Financial Expert
On February 23, 2015, our
Board established an audit committee which operates under a written
charter that has been approved by our Board. The members of our
audit committee are Mr. Punit Dhillon and Mr. Jim Heppell. Mr.
Dhillon serves as chairman of the audit committee and our Board has
determined that he is an “audit committee financial expert” as
defined by applicable SEC rules. The Board has determined that Mr.
Dhillon and Mr. Heppell are independent directors as that term is
defined in Rule 5605(a)(2) of the Nasdaq Listing Rules, and we have
determined that both Mr. Dhillon and Mr. Heppell as audit committee
members meet the more stringent requirements under Rule 5605(c)(2)
of the Nasdaq Listing Rules. Our audit committee met two times
(including telephonic meetings) and took action by written consent
three times.
Our audit committee is
responsible for: (1) selection and oversight of our independent
accountant; (2) establishing procedures for the receipt, retention
and treatment of complaints regarding accounting, internal controls
and auditing matters; (3) establishing procedures for the
confidential, anonymous submission by our employees of concerns
regarding accounting and auditing matters; (4) engaging outside
advisors; and, (5) approving fees for the independent auditor and
any outside advisors engaged by the audit committee. The Audit
Committee Charter is filed as Exhibit 99.1 to our Report on Form
8-K filed on February 27, 2015.
Compensation
Committee
On May 31, 2015, our Board
established a compensation and compliance committee which operated
under a written charter that was approved by the Board. In 2018,
the Board dissolved the former compensation and compliance
committee and established a new compensation committee which
operates under a written charter approved by the Board. The members
of our compensation committee are Mr. Punit Dhillon and Mr. Jim
Heppell. Mr. Heppell serves as chairman of the compensation
committee. Our compensation committee met one time during 2018
(including telephonic meetings) and took action by written consent
three times.
Our compensation committee
is responsible for the oversight of, and the annual and ongoing
review of, the Chief Executive Officer, the compensation of the
senior management team, and the bonus programs in place for
employees, which includes: (1) reviewing the performance of the
Chief Executive Officer and such other senior officers as the Board
may request, and determining the bonus entitlement for such officer
or officers on an annual basis and recommending the same to the
Board for approval; (2) determining the proposed annual
compensation of the executive officers of the Company for each
fiscal year and recommending the same to the Board for approval;
(3) reviewing and discussing the bonus plan proposed for the
Company’s senior management team with the Chief Executive Officer;
(4) reviewing and discussing the terms and conditions of proposed
grants of stock options to directors, employees, consultants and
advisors with the Chief Executive Officer; (5) reviewing and
recommending to the Board the compensation of the Board and
committee members; (6) reviewing and discussing with the Chief
Executive Officer the standard forms of employment and consulting
contracts used by the Company; (7) reviewing and discussing with
the Chief Executive Officer the general benefit plans in place for
employees; (8) engaging and setting the compensation for
independent counsel and other advisors and consultants; and (9)
reviewing and assessing the adequacy of its Charter and submitting
any recommended changes to our Board for its consideration and
approval.
Nomination and Corporate
Governance Committee
In 2018, our Board
established a nominating and corporate governance committee which
operates under a written charter approved by the Board. The members
of our nominating and corporate governance committee are Mr. Punit
Dhillon and Mr. Jim Heppell. Mr. Heppell serves as chairman of the
nominating and corporate governance committee. Our nominating and
corporate governance committee did not meet or take action by
written consent in 2018.
Our nominating and corporate
governance committee is responsible for assisting the Board in (1)
identifying qualified individuals to become Board members,
consistent with criteria approved by the Board, (2) determining the
composition of the Board and its committees, (3) selecting the
director nominees for the next annual meeting of shareholders, (4)
monitoring a process to assess Board, committee and management
effectiveness, (5) aiding and monitoring management succession
planning and (6) developing, recommending to the Board,
implementing and monitoring policies and processes related to the
Company’s corporate governance guidelines.
Finance and Business
Development Committee
In 2018, our Board
established a finance and business development committee which
operates under a written charter approved by the Board. The members
of our finance and business development committee are Mr. Punit
Dhillon and Mr. Jim Heppell. Mr. Punit Dhillon serves as chairman
of the finance and business development committee. Our finance and
business development committee did not meet or take action by
written consent in 2018.
Our finance and business
development committee is responsible for assisting the Board in (1)
matters affecting the Company’s balance sheet, including capital
structure strategies, debt and equity financings and working
capital (2) analysis and assessment of financial and strategic
aspects of major acquisitions and divestitures, collaborations and
joint ventures, (3) formulating and recommending for approval to
the Board the financial policies of the Company, including
management of the financial affairs of the Company, (4) developing
and maintaining relationships with investment banks, financial
institutions and other investors and monitor developments in the
capital markets and financing trends, and (5) evaluating and making
recommendations to the Board concerning business development
opportunities
Nominations to the Board
of Directors
We do not have any defined
policy or procedural requirements for shareholders to submit
recommendations or nominations for directors. Our Board believes
that, given the stage of our development, a specific nominating
policy would be premature and of little assistance until our
business operations develop to a more advanced level. We do not
currently have any specific or minimum criteria for the election of
nominees to the Board. The Board, with the help of its nomination
and corporate governance committee, will assess all candidates,
whether submitted by management or shareholders, and make
recommendations for election or appointment.
Stockholder
Communications
We do not have a formal
policy regarding stockholder communications with our Board. A
shareholder who wishes to communicate with our Board may do so by
directing a written request addressed to our Chief Executive
Officer, at the address appearing on the first page of this
filing.
Code of Ethics
On October 31, 2014, we
adopted a formal code of ethics that applies to our principal
executive officer, principal financial officer, principal
accounting officer or controller, or persons performing similar
functions, as well as our other officers, directors and employees.
A copy of our code of ethics is available on our website at
www.emeraldbio.life. We intend to disclose any future
amendments to provisions of our code of ethics, or waivers of
provisions required to be disclosed under the rules of the SEC, on
a current report on Form 8-K or at the same location on our website
identified in the preceding sentence. Any amendment or waiver
disclosed on our website will remain available on our website for
at least 12 months after the initial disclosure.
EXECUTIVE
COMPENSATION
Summary Compensation
Table
The following table sets
forth information concerning the compensation earned for services
rendered to the Company for the fiscal years ended December 31,
2019 and 2018 of our named executive officers as determined in
accordance with SEC rules.
|
SUMMARY COMPENSATION
TABLE
|
|
Name and
Principal
Position
|
|
Year
|
|
Salary
($)
|
|
|
Bonus
($)
|
|
|
Stock
Awards
($) (1)
|
|
|
Option
Awards
($) (1)
|
|
|
Non-Equity Incentive Plan
Compensation
($)
|
|
|
Nonqualified Deferred
Compensation Earnings
($)
|
|
|
All
Other Compensation
($)
|
|
|
Total
($)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dr. Brian S. Murphy,
|
|
2019
|
|
|
390,000 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
-
|
|
|
|
- |
|
|
|
- |
|
|
|
390,000 |
|
|
CEO/CMO
|
|
2018
|
|
|
390,000 |
|
|
|
- |
|
|
|
171,000 |
|
|
|
- |
|
|
|
-
|
|
|
|
- |
|
|
|
- |
|
|
|
561,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Doug Cesario,
|
|
2019
|
|
|
250,000 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
-
|
|
|
|
- |
|
|
|
- |
|
|
|
250,000 |
|
|
CFO
|
|
2018
|
|
|
174,038 |
|
|
|
- |
|
|
|
169,884 |
|
|
|
200,772 |
|
|
|
-
|
|
|
|
- |
|
|
|
- |
|
|
|
544,694 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dr. Dennis Kim,
|
|
2019
|
|
|
119,812 |
|
|
|
- |
|
|
|
- |
|
|
|
164,985 |
|
|
|
-
|
|
|
|
- |
|
|
|
- |
|
|
|
284,797 |
|
|
CMO
|
|
2018
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
-
|
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Elizabeth M. Berecz,
|
|
2019
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
-
|
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
Former CFO (3)
|
|
2018
|
|
|
246,795 |
|
|
|
- |
|
|
|
133,000 |
|
|
|
- |
|
|
|
-
|
|
|
|
- |
|
|
|
19,277 |
|
|
|
399,072 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Avtar Dhillon,
|
|
2019
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
-
|
|
|
|
- |
|
|
|
117,890 |
|
|
|
117,890 |
|
|
Former Executive Chairman
(4)
|
|
2018
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
225,000 |
|
|
|
-
|
|
|
|
- |
|
|
|
67,885 |
|
|
|
292,885 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cosmas N. Lykos, Former
|
|
2019
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
-
|
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
Chairman (2)(5)
|
|
2018
|
|
|
- |
|
|
|
- |
|
|
|
171,000 |
|
|
|
- |
|
|
|
-
|
|
|
|
- |
|
|
|
220,000 |
|
|
|
391,000 |
|
_________
|
(1)
|
Amounts reflect the full
grant date fair value of restricted stock awards and stock options,
computed in accordance with ASC Topic 718, rather than the amounts
paid to or realized by the named individual.
|
|
(2)
|
In June 2014, our subsidiary
entered into an independent contractor agreement with K2C, Inc.
(“K2C”), which is wholly owned by Mr. Lykos, pursuant to which the
Company paid K2C a monthly fee for services performed by Mr. Lykos
for the Company. The agreement expired on June 1, 2017 and was
automatically renewed for one year pursuant to the terms of the
agreement. The monthly fee under the agreement was $10,000 until
April 1, 2017, at which time it increased to a monthly fee of
$20,000. Under the agreement, Mr. Lykos was also eligible to
participate in our health, death and disability insurance plans. In
addition, beginning in 2015, Mr. Lykos was a participant in our
change in control severance plan. Effective February 28, 2018, the
Company terminated the independent contractor agreement.
|
|
(3)
|
Ms. Berecz separated from
the Company, effective May 25, 2018, pursuant to a Separation
Agreement and Release between the Company and Ms. Berecz.
|
|
(4)
|
Dr. Dhillon resigned as Chairman and member
of the Board of Directors of the Company, effective December 17,
2019. For the year 2018, option awards granted to Dr. Dhillon
represent compensation for services rendered as a member of our
Board and other compensation includes $45,000 earned under the
Independent Contractor Agreement (defined below) and $22,885 in
fees earned for services rendered as a member of our Board. See
“Director Compensation” below. For the year 2019, other
compensation represents fees earned for services rendered as a
member of our Board of Directors.
|
|
(5)
|
Mr. Lykos resigned from the
Board, effective January 18, 2018, in connection with the
consummation of the investment in the Company by Emerald Health
Sciences.
|
Employment and Severance
Arrangements
Employment
Agreements
In May 2018, we entered into
an Executive Employment Agreement with Doug Cesario, our Chief
Financial Officer. The agreement provides for an annual base salary
of $250,000 per year and an annual discretionary bonus based in
part on Mr. Cesario’s achievement of milestones agreed to by the
Board or the Compensation Committee of the Board. Pursuant to the
agreement, Mr. Cesario is entitled to receive the normal benefits
available to other similarly situated executives and will be
entitled to severance pay under certain circumstances. Mr.
Cesario’s employment with the Company is at-will. Except for
termination of Mr. Cesario’s employment for “Cause,” “By Death” or
“By Disability” (as such terms are defined in the agreement), Mr.
Cesario will be entitled to payment of an amount equal to a minimum
of six months of Mr. Cesario’s then-current base salary; and after
three years of employment, Mr. Cesario will be entitled to an
additional two months of his then-current base salary for each year
he is employed beyond the initial three years of employment by the
Company, to a maximum of 12 months.
Pursuant to Mr. Cesario’s
Executive Employment Agreement, Mr. Cesario was granted a one-time
sign-on restricted stock award of 643,501 shares of restricted
stock pursuant to the Company’s 2014 Omnibus Incentive Plan on July
23, 2018, which is the date that was 90 days after Mr. Cesario’s
start date as an employee with the Company. 100% of the restricted
stock award will vest on April 23, 2020, or upon a trigger event,
including the sale of the Company or a merger that results in a
change of control.
In August 2019, we entered
into a letter agreement with Dr. Dennis Kim, our Chief Medical
Officer. The agreement provides for an annual base salary of
$330,000 per year and an annual discretionary bonus target of up to
35% of annual salary. Pursuant to the agreement, Dr. Kim is
entitled to receive the normal benefits available to other
similarly situated executives and will be entitled to severance pay
under circumstances. Dr. Kim’s employment with the Company is
at-will. Except for termination of Dr. Kim’s employment for
“Cause,” by death or by “Disability” (as such terms are defined in
the agreement), Dr. Kim will be entitled to payment of an amount
equal to six months of his then-current base salary for the first
full year of continuous employment with the Company or twelve
months after the first full year. Dr. Kim may take on advisory and
consulting roles for up to 20% of his time so long as such roles do
not conflict with the performance of his duties and
responsibilities with the Company.
Pursuant to Dr. Kim’s
agreement, Dr. Kim was granted a one-time sign-on award of options
to purchase an aggregate of 736,541 shares of common stock of the
Company pursuant to the Plan. Subject to continued employment with
the Company, the stock options vest 25% 90 days after his
employment commenced and the remaining 75% vests 1/33rd
on each of the next 33 months thereafter.
The foregoing description of
the employment agreements does not purport to be complete and is
qualified in its entirety by reference to the full text of the
employment agreements attached hereto as an exhibit and
incorporated by reference herein.
Severance
Arrangements
In February 2015, we adopted
a change in control severance plan, in which our named executive
officers participate, that provides for the payment of severance
benefits if the executive’s service is terminated within twelve
months following a change in control, either due to a termination
without cause or upon a resignation for good reason (as each term
is defined in the plan).
In either such event, and
provided the executive timely executes and does not revoke a
general release of claims against the Company, he or she will be
entitled to receive: (i) a lump sum cash payment equal to at least
six months’ of the executive’s monthly compensation, plus an
additional month for each full year of service over six years, (ii)
Company-paid premiums for continued health insurance for a period
equal to length of the cash severance period or, if earlier, when
executive becomes covered under a subsequent employer’s healthcare
plan, and (iii) full vesting of all then-outstanding unvested stock
options and restricted stock awards.
The restricted stock award
and options granted to Mr. Cesario in July 2018, will vest in full
on a change in control (as defined in our 2014 Omnibus Incentive
Plan).
In January 2018, we entered
into a restricted stock agreement (the “Restricted Stock
Agreements”) with each of Dr. Murphy, Elizabeth Berecz and Cosmas
N. Lykos granting 900,000, 700,000 and 900,000 shares of restricted
Common Stock, respectively. Each Restricted Stock Agreement
provides that if the executive’s employment or service is
terminated by us without cause, or is terminated by the grantee for
good reason, then the executive shall be entitled to receive a cash
severance payment equal to six months of their base compensation,
payable in substantially equal installments during the six-month
period following the termination date.
In February 2018, we entered
into a separation and release agreement with K2C, which provided
for a lump sum payment of $180,000 and the immediate vesting of
900,000 shares of restricted common stock granted pursuant to the
Restricted Stock Agreement, 325,000 shares of restricted common
stock granted on October 20, 2015, 125,000 options granted on
November 21, 2014, in exchange for a release of claims and certain
other agreements. In addition, K2C also holds 1,110,000 shares of
fully vested common stock pursuant to the common stock purchase
warrant agreement dated June 20, 2013.
In April 2018, we entered
into a Separation Agreement and Release with Elizabeth Berecz, our
former Chief Financial Officer. Pursuant to the agreement, Ms.
Berecz agreed to certain ongoing cooperation obligations during a
transition period and agreed to provide certain releases and
waivers as contained in the agreement. As consideration under the
agreement, the Company agreed to provide Ms. Berecz compensation
and benefits as follows: (i) through May 25, 2018, Ms. Berecz’s
separation date, an annualized base salary at the rate in effect as
of the date of the separation agreement; (ii) a lump sum gross
payment of $145,833, in consideration for the restrictive covenants
contained in the separation agreement; and (iii) reimbursement for
payments made by Ms. Berecz for COBRA coverage for a period of six
(6) months following her separation date. In addition, the terms of
the separation agreement provided for the immediate vesting of
700,000 shares of restricted common stock granted pursuant to Ms.
Berecz’s Restricted Stock Agreement, 350,000 shares of restricted
common stock granted on October 20, 2015, and 250,000 options
granted in October 2014 and November 2014.
The foregoing descriptions
of the separation agreements do not purport to be complete and are
qualified in their entirety by reference to the full text of such
separation agreements attached hereto as exhibits and incorporated
by reference herein.
Outstanding Equity Awards
at Fiscal Year-end
As of December 31, 2019, our
named executive officers held the following outstanding Company
equity awards.
|
|
|
|
Option Awards
|
|
Stock Awards
|
|
|
Name
|
|
|
|
Grant
Date
|
|
Number of Securities
Underlying Unexercised
Options (#)
Exercisable
|
|
|
Number of Securities
Underlying Unexercised
Options (#)
Un-exercisable
|
|
|
Option
Exercise
Price
|
|
|
Option
Expiration Date
|
|
Number of
Shares of
Stock Not
Vested (#)
|
|
|
Market
Value of
Shares Not
Vested ($) (2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dr. Brian S. Murphy,
|
|
|
(1)
|
|
|
10/31/2014
|
|
|
480,000
|
|
|
|
-
|
|
|
$
|
0.42
|
|
|
10/31/2024
|
|
|
|
|
|
|
|
CEO/CMO
|
|
|
(1)
|
|
|
11/21/2014
|
|
|
175,000
|
|
|
|
-
|
|
|
$
|
0.42
|
|
|
11/21/2024
|
|
|
|
|
|
|
|
|
|
(6)
|
|
|
1/1/2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
450,000
|
|
|
|
58,725
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Doug Cesario,
|
|
|
(3)
|
|
|
5/25/2018
|
|
|
787,662
|
|
|
|
407,411
|
|
|
$
|
0.245
|
|
|
5/25/2028
|
|
|
|
|
|
|
|
|
|
CFO
|
|
|
(4)
|
|
|
5/25/2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
643,501
|
|
|
|
83,977
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dr. Dennis Kim, CMO
|
|
|
(7)
|
|
|
8/21/2019
|
|
|
217,614
|
|
|
|
518,927
|
|
|
$
|
0.300
|
|
|
8/21/2029
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Avtar Dhillon, Former Executive
Chairman
|
|
|
(5)
|
|
|
10/10/2018
|
|
|
1,000,000
|
|
|
|
-
|
|
|
$
|
0.305
|
|
|
10/10/2028
|
|
|
|
|
|
|
|
|
___________
|
(1)
|
The options specified above
vest as follows: 20% of total vests on each anniversary of the
grant date over five years, subject to the grantee’s continued
service. The options granted expire 10 years after the date of
grant.
|
|
|
|
(2)
|
The market value of shares
that have not vested is calculated based on the per share closing
price of our common stock on December 31, 2019.
|
|
|
|
(3)
|
The options specified above
vest as follows: 25% of total vests on the grant date and 1/33 each
month thereafter on the anniversary of the grant date.
|
|
|
|
(4)
|
The restricted stock vests
in full on the two-year anniversary of the grant date, subject to
the grantee’s continued service.
|
|
|
|
(5)
|
The options specified above
vest in twelve equal monthly installments following the grant
date.
|
|
|
|
(6)
|
The restricted stock vests
1/2 each year on the anniversary of the grant date and is subject
to acceleration upon termination.
|
|
|
|
|
(7)
|
The options specified above vest as follows:
25% of the total vests 90 days after his employment commenced and
the remaining 75% vests 1/33rd on each of the next 33 months
thereafter.
|
Non-Equity Incentive Plan
Awards
In May 2018, in connection
with the appointment of Mr. Cesario as our Chief Financial Officer
and pursuant to the terms of the Executive Employment Agreement
between the Company and Mr. Cesario, we entered into a stock option
award agreement with Mr. Cesario pursuant to which Mr. Cesario was
granted non-qualified stock options to purchase an aggregate of
1,195,073 shares of the Company’s common stock at an exercise price
of $0.245 per share on July 23, 2018. 25% of the options vested on
the date of grant and the remaining 75% of the options vest 1/33 on
each of the next 33 months thereafter. The options will fully vest
upon a trigger event, including the sale of the Company or a merger
that results in a change of control.
Exercises of
Options
There were no exercises of
stock options by our named executive officers during the year ended
December 31, 2019.
Director
Compensation
On October 10, 2018, the
Company amended its policy for the compensation of its non-employee
directors as follows:
|
|
·
|
Each non-employee director
will receive a cash retainer of $40,000 on an annual basis, and the
executive chair of the Board, if a non-employee director, will
receive an additional $40,000 retainer annually.
|
|
|
|
|
|
·
|
Upon election to the Board,
non-employee directors will receive a one-time award of 200,000
stock options which will vest in twelve equal monthly installments.
In subsequent annual periods, each non-employee director will
receive a grant of 100,000 common stock options which will vest in
twelve equal monthly installments.
|
Non-employee directors who
serve as members of special committees of the Board will receive
additional compensation as follows:
|
|
·
|
Audit Committee: $5,000 per
year ($20,000 for the chair)
|
|
|
|
|
|
·
|
Compensation Committee:
$2,500 per year ($10,000 for the chair)
|
|
|
|
|
|
·
|
Nominating and Corporate
Governance Committee: $1,000 per year ($5,000 for the chair)
|
|
|
|
|
|
·
|
Finance and Business
Development Special Committee: $40,000 per year for the chair (no
compensation for other members)
|
Our directors received the
following compensation for their service as directors of the
Company during the fiscal year ended December 31, 2019.
|
DIRECTOR COMPENSATION
(1)
|
|
Name
|
|
Fees
Earned
or Paid
in Cash
|
|
|
Stock
Awards
$ (2)
|
|
|
Option
Awards
$ (2)
|
|
|
Non-Equity
Incentive Plan
Compensation
$
|
|
|
Non-Qualified
Deferred Compensation
Earnings
$
|
|
|
All
Other Compensation
$
|
|
|
Total
$
|
|
|
Punit Dhillon
|
|
|
65,005 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
65,005 |
|
|
Jim Heppell
|
|
|
60,000 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
60,000 |
|
|
Avtar Dhillon
|
|
|
117,890 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
117,890 |
|
____________
|
(1)
|
Does not include
compensation received for services provided as executive
officers.
|
|
|
|
(2)
|
Each non-employee director is entitled to an
annual grant of 100,000 common stock options that vest in twelve
equal monthly installments. However, no option grants were approved
by the Board for Directors in 2019. Amounts reflect the full grant
date fair value of restricted stock awards and stock options,
computed in accordance with ASC Topic 718, rather than the amounts
paid to or realized by the named individual. We provide information
regarding the assumptions used to calculate the value of restricted
stock awards and options granted to our directors in Note 2 and 6
to our Consolidated Financial Statements included elsewhere in this
prospectus.
|
Securities Authorized for
Issuance under Equity Compensation Plans
The table below includes the
following information as of December 31, 2019 for the Emerald
Bioscience, Inc. 2014 Omnibus Incentive Plan. Shares available for
issuance under the 2014 Omnibus Incentive Plan can be granted
pursuant to stock options, stock appreciation rights, restricted
stock, restricted stock unit awards, performance awards and other
stock-based or cash-based awards, as selected by the plan
administrator. For additional information about the 2014 Omnibus
Incentive Plan, refer to Note 6 to our Consolidated Financial
Statements included elsewhere in this prospectus.
|
Equity Compensation Plan
Information
|
|
Plan category
|
|
Number of shares of common
stock to be issued upon exercise of outstanding options, warrants
and rights
(a)
|
|
|
Weighted-average exercise
price of outstanding options, warrants and rights
(b)
|
|
|
Number of shares of common
stock remaining available for future issuance under equity
compensation plans (excluding shares of common stock reflected in
column (a))
(c)
|
|
|
Equity compensation plans
approved by security holders
|
|
|
3,317,642 |
|
|
$ |
0.326 |
|
|
|
13,128,381 |
|
|
Equity compensation plans
not approved by security holders (1)
|
|
|
1,195,073 |
|
|
|
0.245 |
|
|
|
-- |
|
|
Total
|
|
|
4,512,715 |
|
|
$ |
0.304 |
|
|
|
13,128,381 |
|
____________
|
(1)
|
Reflects 1,195,073 shares of
common stock issuable upon exercise of stock options granted to Mr.
Cesario with an exercise price equal to $0.245 pursuant to a Stock
Option Agreement.
|
Security Ownership of
Certain Beneficial Owners and Management
The following table sets
forth certain information with respect to beneficial ownership of
our common stock, by:
|
|
·
|
Each person known to be the
beneficial owner of 5% or more of our outstanding common stock;
|
|
|
·
|
Each executive officer;
|
|
|
·
|
Each director; and
|
|
|
·
|
All of the executive
officers and directors as a group.
|
Beneficial ownership has
been determined in accordance with Rule 13d-3 under the Exchange
Act. Under this rule, certain shares may be deemed to be
beneficially owned by more than one person (if, for example,
persons share the power to vote or the power to dispose of the
shares). In addition, shares are deemed to be beneficially owned by
a person if the person has the right to acquire shares (for
example, upon exercise of an option or warrant) within 60 days of
the date as of which the information is provided. In computing the
percentage ownership of any person, the amount of shares is deemed
to include the amount of shares beneficially owned by such person
by reason of such acquisition rights. As a result, the percentage
of outstanding shares of any person as shown in the following table
does not necessarily reflect the person’s actual voting power at
any particular date.
The information set forth in the table below
is based on 182,895,247 shares of our common stock issued and
outstanding on February 6, 2020.
To our knowledge, except as
indicated in the footnotes to this table and pursuant to applicable
community property laws, the persons named in the table have sole
voting and investment power with respect to all shares of common
stock shown as beneficially owned by them. Unless otherwise
indicated, the address of each beneficial owner listed below is 130
North Marina Drive, Long Beach, CA 90803.
|
Name and Address of
Beneficial Owner
|
|
Amount
and Nature of
Beneficial
Ownership
|
|
|
Percent
of Class
|
|
|
|
|
|
|
|
|
|
|
Emerald Health Sciences Inc.
(1)
|
|
|
126,526,399
|
(2) |
|
64.7
|
% |
|
|
|
|
|
|
|
|
|
|
Dr. Brian S. Murphy
|
|
|
1,930,000 |
(3) |
|
1.1
|
% |
|
|
|
|
|
|
|
|
|
|
Doug Cesario
|
|
|
1,485,484
|
(4) |
|
*
|
% |
|
|
|
|
|
|
|
|
|
|
Dr. Dennis Kim
|
|
|
251,093
|
(5) |
|
*
|
% |
|
|
|
|
|
|
|
|
|
|
Punit Dhillon
|
|
|
200,000 |
(6) |
|
*
|
% |
|
|
|
|
|
|
|
|
|
|
Jim Heppell
|
|
|
200,000 |
(7) |
|
*
|
% |
|
|
|
|
|
|
|
|
|
|
All executive officers and
directors as a group (6 persons)
|
|
|
4,066,577
|
|
|
2.2
|
% |
__________
|
*
|
Denotes less than 1% of our
outstanding shares of common stock.
|
|
(1)
|
The address of this entity
is Office 8262, The Landing, 200 – 375 Water St., Vancouver,
British Columbia, Canada V6B 0M9.
|
|
|
|
(2)
|
Includes (i) 113,953,917 shares of common
stock, (ii) 7,500,000 shares issuable on exercise of warrants and
(iii) 5,072,482 shares issuable upon the conversion of outstanding
principal and accrued interest associated with the Credit
Agreement.
|
|
|
|
(3)
|
Includes (i) 655,000 shares of common stock
underlying options that may be exercised within 60 days of February
6, 2020 and (ii) 1,275,000 shares of fully vested restricted
stock.
|
|
|
|
(4)
|
Includes (i) 841,983 shares of common stock
underlying options that may be exercised within 60 days of February
6, 2020, and (ii) 643,501 shares of restricted stock subject to
vesting.
|
|
|
|
(5)
|
Includes 251,093 shares of common stock
underlying options that may be exercised within 60 days of February
6, 2020.
|
|
|
|
(6)
|
Includes 200,000 shares of common stock
underlying options that may be exercised within 60 days of February
6, 2020.
|
|
|
|
(7)
|
Includes 200,000 shares of common stock
underlying options that may be exercised within 60 days of February
6, 2020.
|
Changes in
Control
Our management is not aware
of any arrangements which may result in “changes in control” as
that term is defined by the provisions of Item 403(c) of Regulation
S-K.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
INDEPENDENCE
Transactions with Related
Persons
Except as specified below,
there have been no other transactions with related persons in the
last two fiscal years, or any currently proposed transaction, in
which we were or are to be a participant and the amount involved
exceeds the lesser of $120,000 or 1% of the average of the
Company’s total assets as of December 31, 2017 and 2018, and in
which any related person had or will have a direct or indirect
material interest.
K2C
In June 2014, our subsidiary
entered into an independent contractor agreement with K2C, which is
wholly owned by Mr. Lykos, who served as the Chairman of our Board
until January 16, 2018, pursuant to which the Company paid K2C a
monthly fee for services performed by Mr. Lykos for the Company.
The agreement expired on June 1, 2017 and was automatically renewed
for one year pursuant to the terms of the agreement. The monthly
fee under the agreement was $10,000 and increased to $20,000
effective April 1, 2017. In 2017 and 2018, we paid K2C $210,000 and
$220,000 respectively. Under the agreement, Mr. Lykos was also
eligible to participate in our health, death and disability
insurance plans. The independent contractor agreement with K2C was
terminated as of February 28, 2018.
In January 19, 2018, we
entered into a Restricted Stock Agreement with K2C granting 900,000
Restricted Stock to K2C.
In February 28, 2018, we
entered into a separation and release agreement with K2C, which
provided for a lump sum payment of $180,000 and the immediate
vesting of 900,000 shares of restricted common stock granted
pursuant to the Restricted Stock Agreement, 325,000 shares of
restricted common stock granted on October 20, 2015, 125,000
options granted on November 21, 2014, in exchange for a release of
claims and certain other agreements. In addition, K2C also holds
1,110,000 shares of fully vested common stock pursuant to the
common stock purchase warrant agreement dated June 20, 2013.
Elizabeth Berecz
In April 2018, we entered
into a Separation Agreement and Release with Elizabeth Berecz, our
former Chief Financial Officer. Pursuant to the agreement, we
agreed to provide Ms. Berecz compensation and benefits as follows:
(i) through May 25, 2018, Ms. Berecz’s separation date, an
annualized base salary at the rate in effect as of the date of the
separation agreement; (ii) a lump sum gross payment of $145,833, in
consideration for the restrictive covenants contained in the
separation agreement; and (iii) reimbursement for payments made by
Ms. Berecz for COBRA coverage for a period of six (6) months
following her separation date. In addition, the terms of the
separation agreement provided for the immediate vesting of 700,000
shares of restricted common stock granted pursuant to Ms. Berecz’s
Restricted Stock Agreement, 350,000 shares of restricted common
stock granted on October 20, 2015, and 250,000 options granted in
October 2014 and November 2014.
Emerald Health
Sciences
On December 28, 2017, we
entered into a Secured Promissory Note and Security Agreement for a
convertible loan (the “Convertible Promissory Note”) with Emerald
Health Sciences. The Convertible Promissory Note provided for
aggregate gross proceeds to the Company of up to $900,000 and was
secured by all of the Company’s assets.
On January 19, 2018,
$900,000 funded under the Convertible Promissory Note converted
into 9,000,000 shares of our common stock and the Convertible
Promissory Note was terminated. Simultaneously, we entered into a
Securities Purchase Agreement (the “Emerald Health Sciences
Financing”) in which we sold to Emerald Health Sciences 15,000,000
shares of common stock and a warrant to purchase 20,400,000 shares
of common stock at an exercise price of $0.10 for aggregate gross
proceeds of $1,500,000. The second closing under the Emerald Health
Sciences Financing occurred on February 16, 2018, pursuant to which
we issued and sold to Emerald Health Sciences 15,000,000 shares of
our Common Stock, and a warrant to purchase 20,400,000 shares of
Common Stock at an exercise price of $0.10 per share for a term of
five years, for aggregate gross proceeds of $1,500,000.
On February 1, 2018, we
entered into an Independent Contractor Agreement (the “Independent
Contractor Agreement”) with Emerald Health Sciences, pursuant to
which Emerald Health Sciences agreed to provide such services as
are mutually agreed between the Company and Emerald Health
Sciences, including reimbursements for reasonable expenses incurred
in the performance of the Independent Contractor Agreement. These
services may include, but are not limited to, corporate advisory
services and technical expertise in the areas of business
development, marketing, investor relations, information technology
and product development. The Independent Contractor Agreement has
an initial term of ten years and specifies compensation which is
agreed upon between the Company’s chief executive officer and
Emerald Health Sciences’ Chairman, CEO and President on a
month-to-month basis. The fee due under this agreement is payable
on a monthly basis; however, if the Company is unable to make
payments due to insufficient funds, then interest on the
outstanding balance will accrued at a rate of 12% per annum,
calculated semi-annually. Under this agreement, the Company
incurred expenses of $550,000 during the fiscal year ended December
31, 2018. As of December 19, 2019, all such expenses have been paid
and the Independent Contractor Agreement was terminated effective
December 31, 2019.
On February 6, 2018, the
Company entered into a Consulting Agreement with Dr. Avtar Dhillon,
the Chairman, Chief Executive Officer and President of Emerald
Health Sciences. The services under the Consulting Agreement
included, corporate finance and strategic business advisory. The
Consulting Agreement had an initial term of one year and was
renewable automatically unless terminated by either party. The
agreement specified an annual fee of $60,000 payable semi-monthly
in installments and included reimbursement for reasonable expenses
incurred in the performance of the services. The contractor was
also entitled to a discretionary annual bonus, payable 120 days
after each fiscal year end, to be determined by the Board upon its
annual review. Under this agreement, we incurred expenses in the
amount of $45,000 during the fiscal year ended December 31, 2018.
This Consulting Agreement was canceled on October 5, 2018 in
connection with the Company’s entry into the Credit Agreement with
Emerald Health Sciences and Dr. Dhillon’s appointment as the
Executive Chairman of the Company’s Board.
On October 5, 2018, the
Company entered into the Credit Agreement with Emerald Health
Sciences. The Credit Agreement provides for a credit facility to
the Company of up to $20,000,000 and is unsecured. Advances under
the Credit Agreement bear interest at an annual rate of 7% (payable
quarterly in arrears) and mature on October 5, 2022. At Emerald
Health Sciences’ election, advances and unpaid interest may be
converted into Common Stock at a fixed conversion price of $0.30,
subject to customary adjustments for stock splits, stock dividends,
recapitalizations, etc. In connection with each advance under the
Credit Agreement, the Company has agreed to issue Emerald Health
Sciences warrants to purchase shares of common stock in an amount
equal to 50% of the number of shares of common stock that each
advance may be converted into. The warrants have an exercise price
of $0.50 per share, a term of five years and will be immediately
exercisable upon issuance. The exercise price is subject to
adjustment in the event of certain stock dividends and
distributions, stock splits, stock combinations, reclassifications
or similar events or upon any distributions of assets, including
cash, stock or other property to the Company’s shareholders. On
November 1, 2018, the Company effected an initial draw under the
Credit Agreement in the amount of $2,000,000 and issued Emerald
Health Sciences a warrant to purchase 2,500,000 shares of common
stock at an exercise price of $0.50 per share, in accordance with
the terms of the Credit Agreement. On February 1, 2019, the Company
effected the second draw under the Credit Agreement in the amount
of $2,000,000 and issued Emerald Health Sciences a warrant to
purchase 2,500,000 shares of common stock at an exercise price of
$0.50 per share, in accordance with the terms of the Credit
Agreement. On March 29, 2019, the Company effected the third draw
under the Credit Agreement in the amount of $2,000,000 and issued
Emerald Health Sciences a warrant to purchase 2,500,000 shares of
common stock at an exercise price of $0.50 per share, in accordance
with the terms of the Credit Agreement. On December 20, 2019, the
Company entered into an Warrant Exchange Agreement, pursuant to
which Emerald Health Sciences has exercised 40.80 million of such
warrants and paid the aggregate exercise price of approximately
$4.08 million for the related warrant shares in the form of a
reduction of the corresponding amount of obligations outstanding
under the Credit Agreement. Upon consummation of the transaction
under the Warrant Exchange Agreement, the total outstanding
principal amount excluding discounts under the Credit Agreement was
$2,014,500. We have the ability to continue borrowing under this
Credit Agreement, however there is no guarantee of continued
funding. A portion of the proceeds raised in this offering may be
used to pay, in whole or in part, the principal and accrued
interest on our Credit Agreement. See “Use of Proceeds.” The net
proceeds of each advance shall be used for general corporate
purposes and are subject to approval by the Company’s Board, which
is controlled by the directors and principal executive officer of
Emerald Health Sciences.
On December 19, 2019, the
Company entered into an Independent Contractor Services Agreement
with Dr. Avtar Dhillon, pursuant to which Dr. Dhillon will provide
ongoing corporate finance and strategic business advisory services
to the Company. In exchange for his services, Dr. Dhillon will
receive a monthly fee of $10,000, with (i) $5,000 paid each month
and (ii) $5,000 accruing from the effective date and payable upon
Company’s completion of a material financing. The Board will review
the monthly rate paid to Dr. Dhillon within 90 days of the end of
each fiscal year. The Independent Contractor Services Agreement has
an initial term of one year and will renew automatically thereafter
unless terminated earlier by either party. The Independent
Contractor Services Agreement may be terminated by either party for
cause upon written notice to the other party if the other party
defaults in the performance of the agreement in any material
respect or materially breaches the terms of the agreement, or
without cause upon 30 days’ prior written notice to the other
party.
On December 19, 2019, the
Company entered into a Board Observer Agreement with Emerald Health
Sciences. The Board Observer Agreement gives a right to Emerald
Health Sciences to designate one observer to the Board of Directors
of the Company for so long as Emerald Health Sciences maintains
ownership of any securities in the Company. Under the Board
Observer Agreement, the board observer will be permitted to attend
all meetings (whether in person, telephonically or otherwise) of
the Board in a non-voting, observer capacity. Emerald Health
Sciences appointed Dr. Avtar Dhillon as an initial board observer.
The Board Observer Agreement may be terminated by either party for
cause upon written notice to the other party if the other party
defaults in the performance of the agreement in any material
respect or materially breaches the terms of the agreement, or
without cause upon 30 days’ prior written notice to the other
party.
Review, Approval and
Ratification of Related Party Transactions
Given our small size and
limited financial resources, we have not adopted formal policies
and procedures for the review, approval or ratification of
transactions, such as those described above, with our executive
officers, directors and significant stockholders. However, all of
the transactions described above were approved and ratified by our
Board. In connection with the approval of the transactions
described above, our Board took into account several factors,
including their fiduciary duties to the Company, the relationships
of the related parties described above to the Company, the material
facts underlying each transaction, the anticipated benefits to the
Company and related costs associated with such benefits, whether
comparable products or services were available, and the terms the
Company could receive from an unrelated third party.
We intend to establish
formal policies and procedures in the future, once we have
sufficient resources and have appointed additional directors, so
that such transactions will be subject to the review, approval or
ratification of our Board, or an appropriate committee thereof. On
a moving forward basis, our Board will continue to approve any
related party transaction based on the criteria set forth
above.
Conflicts Related to
Other Business Activities
The persons serving as our
officers and directors have existing responsibilities and, in the
future, may have additional responsibilities, to provide management
and services to other entities in addition to us. As a result,
conflicts of interest between us and the other activities of those
persons may occur from time to time.
We will attempt to resolve
any such conflicts of interest in our favor. Our officers and
directors are accountable to us and our shareholders as
fiduciaries, which requires that such officers and directors
exercise good faith and integrity in handling our affairs. A
shareholder may be able to institute legal action on our behalf or
on behalf of that shareholder and all other similarly situated
shareholders to recover damages or for other relief in cases of the
resolution of conflicts in any manner prejudicial to us.
Director
Independence
We have determined that
Punit Dhillon and Jim Heppell are independent members of our Board,
as that term is defined in Rule 5605(a)(2) of the Nasdaq Listing
Rules.
Insider Trading
Policy
On October 31, 2014, our
Board adopted an Insider Trading Policy applicable to all directors
and officers. Insider trading generally refers to the buying or
selling of a security in breach of a fiduciary duty or other
relationship of trust and confidence while in possession of
material, non-public information about the security. Insider
trading violations may also include ‘tipping’ such information,
securities trading by the person ‘tipped,’ and securities trading
by those who misappropriate such information. The scope of insider
trading violations can be wide reaching. As such, our Board has
adopted an Insider Trading Policy that outlines the definitions of
insider trading, the penalties and sanctions determined, and what
constitutes material, non-public information. Illegal insider
trading is against our policy as such trading can cause significant
harm to the reputation for integrity and ethical conduct of our
company. Individuals who fail to comply with the requirements of
the policy are subject to disciplinary action, at our sole
discretion, including dismissal for cause. All members of our Board
and all executive officers are required to ratify the terms of this
policy on an annual basis. Our Insider Trading Policy is available
on our website at www.emeraldbio.life.
EXPERTS
Mayer Hoffman McCann P.C.,
our independent registered public accounting firm, has audited our
consolidated balance sheets as of December 31, 2018 and 2017, and
the related consolidated statements of operations and comprehensive
loss, stockholders’ deficit and cash flows for each of the two
years in the period ended December 31, 2018, and the related notes,
as set forth in their report, which report expresses an unqualified
opinion and includes an explanatory paragraph relating to our
ability to continue as a going concern. Such financial statements
have been included in this prospectus and in this Registration
Statement in reliance on the report of Mayer Hoffman McCann P.C.
given on their authority as experts in accounting and auditing.
LEGAL MATTERS
The validity of our common stock offered
hereby will be passed upon for us by Greenberg Traurig, LLP. The
Placement Agent is being represented by Ellenoff Grossman &
Schole LLP.
INTERESTS
OF NAMED EXPERTS AND COUNSEL
No expert or counsel named
in this prospectus as having prepared or certified any part of this
prospectus or having given an opinion upon the validity of the
securities being registered or upon other legal matters in
connection with the registration or offering of the common stock
was employed for such purpose on a contingency basis, or had, or is
to receive, in connection with this offering, a substantial
interest, direct or indirect, in us or any of our parents or
subsidiaries, nor was any such person connected with us or any of
our parents or subsidiaries as a promoter, managing or principal
underwriter, voting trustee, director, officer, or employee.
WHERE
YOU CAN FIND ADDITIONAL INFORMATION
We file annual, quarterly
and current reports, proxy statements and other information with
the SEC. Such filings are available to the public over the internet
at the SEC’s website at http://www.sec.gov.
We have filed with the SEC a
registration statement on Form S-1 under the Securities Act with
respect to the securities offered under this prospectus. This
prospectus, which forms a part of that registration statement, does
not contain all information included in the registration statement.
Certain information is omitted and you should refer to the
registration statement and its exhibits.
You may review a copy of the
registration statement at the SEC’s public reference room at 100 F
Street, N.E. Washington, D.C. 20549. You may obtain information on
the operation of the public reference room by calling the SEC at
1-800-SEC-0330. You may also read and copy any materials we file
with the SEC at the SEC’s public reference room. Our filings and
the registration statement can also be reviewed by accessing the
SEC’s website at http://www.sec.gov.
EMERALD BIOSCIENCE, INC. AND
SUBSIDIARY
INDEX TO CONSOLIDATED
FINANCIAL STATEMENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
To the Board of Directors
and
Stockholders of Nemus
Bioscience, Inc. and Subsidiary:
Opinion on the Financial
Statements
We have audited the
accompanying consolidated balance sheets of Nemus Bioscience, Inc.
and Subsidiary (“Company”) as of December 31, 2018 and 2017, and
the related consolidated statements of operations, stockholders’
deficit, and cash flows for each of the two years in the period
ended December 31, 2018, and the related notes (collectively
referred to as the “financial statements”). In our opinion, the
financial statements present fairly, in all material respects, the
financial position of the Company as of December 31, 2018 and 2017,
and the results of its operations and its cash flows for each of
the two years in the period ended December 31, 2018, in conformity
with accounting principles generally accepted in the United States
of America.
Going Concern
Uncertainty
The accompanying financial
statements have been prepared assuming that the Company will
continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has incurred recurring operating
losses and is dependent on additional financing to fund operations.
These conditions raise substantial doubt about the Company’s
ability to continue as a going concern. Management’s plans in
regard to these matters are described in Note 1 to the financial
statements. The financial statements do not include any adjustments
to reflect the possible future effects on the recoverability and
classification of assets or the amounts and classification of
liabilities that may result from the outcome of this
uncertainty.
Basis for Opinion
These financial statements
are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial
statements based on our audits. We are a public accounting firm
registered with the Public Company Accounting Oversight Board
(United States) (“PCAOB”) and are required to be independent with
respect to the Company in accordance with the U.S. federal
securities laws and the applicable rules and regulations of the
Securities and Exchange Commission and the PCAOB.
We conducted our audits in
accordance with the standards of the PCAOB. Those standards require
that we plan and perform the audits to obtain reasonable assurance
about whether the financial statements are free of material
misstatement, whether due to error or fraud. The Company is not
required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. As part of our audits we
are required to obtain an understanding of internal control over
financial reporting but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over
financial reporting. Accordingly, we express no such opinion.
Our audits included
performing procedures to assess the risks of material misstatement
of the financial statements, whether due to error or fraud, and
performing procedures that respond to those risks. Such procedures
included examining, on a test basis, evidence regarding the amounts
and disclosures in the financial statements. Our audits also
included evaluating the accounting principles used and significant
estimates made by management, as well as evaluating the overall
presentation of the financial statements. We believe that our
audits provide a reasonable basis for our opinion.
/s/ Mayer Hoffman McCann
P.C.
We have served as the
Company’s auditor since 2014.
Irvine, California
March 14, 2019
NEMUS BIOSCIENCE, INC. AND
SUBSIDIARY
CONSOLIDATED BALANCE
SHEETS
|
|
|
December 31,
|
|
|
ASSETS
|
|
2018
|
|
|
2017
|
|
|
Current assets
|
|
|
|
|
|
|
|
Cash and cash
equivalents
|
|
$ |
1,853,373 |
|
|
$ |
259,955 |
|
|
Restricted
cash
|
|
|
4,512 |
|
|
|
4,428 |
|
|
Prepaid
expenses
|
|
|
93,193 |
|
|
|
291,428 |
|
|
Other current
assets
|
|
|
2,609 |
|
|
|
- |
|
|
Total current
assets
|
|
|
1,953,687 |
|
|
|
555,811 |
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment,
net
|
|
|
3,445 |
|
|
|
1,407 |
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$ |
1,957,132 |
|
|
$ |
557,218 |
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES, REDEEMABLE
CONVERTIBLE PREFERRED
|
|
|
|
|
|
|
|
|
|
STOCK AND STOCKHOLDERS’
DEFICIT
|
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$ |
15,597 |
|
|
$ |
100,921 |
|
|
Accrued payroll
and related expenses
|
|
|
66,213 |
|
|
|
54,512 |
|
|
Accrued
expenses
|
|
|
118,248 |
|
|
|
143,826 |
|
|
Derivative
liabilities
|
|
|
15,738,913 |
|
|
|
271,715 |
|
|
Secured
convertible promissory note - related party, net of discount
|
|
|
- |
|
|
|
235,000 |
|
|
Total current
liabilities
|
|
|
15,938,971 |
|
|
|
805,974 |
|
|
|
|
|
|
|
|
|
|
|
|
Noncurrent
liabilities
|
|
|
|
|
|
|
|
|
|
Convertible
multi-draw credit agreement - related party, net of discount
|
|
|
1,360,960 |
|
|
|
- |
|
|
Derivative
liabilities, noncurrent
|
|
|
219,453 |
|
|
|
551,322 |
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
17,519,384 |
|
|
|
1,357,296 |
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and
contingencies
|
|
|
|
|
|
|
|
|
|
(Note 10)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock, $0.001 par
value; 20,000,000 shares authorized Redeemable Convertible Series B
Preferred Stock net of $347,091 issuance costs (0 and 2,833.55
issued and outstanding as of December 31, 2018 and December 31,
2017, respectively; $2.8 million liquidation preference as of
December 31, 2017)
|
|
|
- |
|
|
|
822,201 |
|
|
Convertible Series D Preferred
Stock, net of $30,557 issuance costs (0 and 200 issued and
outstanding as of December 31, 2018 and December 31, 2017,
respectively; $0.2 million liquidation preference as of December
31, 2017)
|
|
|
- |
|
|
|
169,446 |
|
|
Convertible Series F Preferred
Stock, net of $118,855 issuance costs (0 and 2,000 issued and
outstanding as of December 31, 2018 and December 31, 2017,
respectively)
|
|
|
- |
|
|
|
1,777,781 |
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
deficit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock,
$0.001 par value; 500,000,000 shares authorized; 133,907,747 issued
and outstanding as of December 31, 2018 and 33,622,829 issued and
outstanding as of December 31, 2017
|
|
|
133,908 |
|
|
|
33,623 |
|
|
Additional
paid-in-capital
|
|
|
16,230,956 |
|
|
|
9,444,831 |
|
|
Warrants
|
|
|
1,297,991 |
|
|
|
982,911 |
|
|
Accumulated
deficit
|
|
|
(33,225,107 |
) |
|
|
(14,030,871 |
) |
|
Total
stockholders’ deficit
|
|
|
(15,562,252 |
) |
|
|
(3,569,506 |
) |
|
Total
liabilities and stockholders’ deficit
|
|
$ |
1,957,132 |
|
|
$ |
557,218 |
|
See accompanying notes to the
consolidated financial statements.
NEMUS BIOSCIENCE, INC. AND
SUBSIDIARY
CONSOLIDATED STATEMENTS OF
OPERATIONS AND COMPREHENSIVE LOSS
|
|
|
Year Ended December
31,
|
|
|
|
|
2018
|
|
|
2017
|
|
|
Operating
expenses
|
|
|
|
|
|
|
|
Research and
development
|
|
$ |
329,966 |
|
|
$ |
311,302 |
|
|
General and
administrative
|
|
|
4,362,557 |
|
|
|
3,547,927 |
|
|
|
|
|
|
|
|
|
|
|
|
Total operating
expenses
|
|
|
4,692,523 |
|
|
|
3,859,229 |
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(4,692,523 |
) |
|
|
(3,859,229 |
) |
|
|
|
|
|
|
|
|
|
|
|
Other expense
(income)
|
|
|
|
|
|
|
|
|
|
Change in fair
value of derivative liabilities
|
|
|
6,503,174 |
|
|
|
(767,198 |
) |
|
Fair value of
warrant liability in excess of proceeds
|
|
|
7,174,634 |
|
|
|
- |
|
|
Financing
transaction costs
|
|
|
137,192 |
|
|
|
- |
|
|
Loss on
extinguishment of secured convertible promissory note - related
party
|
|
|
590,392 |
|
|
|
- |
|
|
Interest
expense
|
|
|
94,763 |
|
|
|
667 |
|
|
Interest
income
|
|
|
(84 |
) |
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income
taxes
|
|
|
(19,192,594 |
) |
|
|
(3,092,698 |
) |
|
|
|
|
|
|
|
|
|
|
|
Provision for
income taxes
|
|
|
1,642 |
|
|
|
1,600 |
|
|
|
|
|
|
|
|
|
|
|
|
Net loss and
comprehensive loss
|
|
$ |
(19,194,236 |
) |
|
$ |
(3,094,298 |
) |
|
|
|
|
|
|
|
|
|
|
|
Less: Preferred deemed
dividend
|
|
|
- |
|
|
|
1,044,000 |
|
|
Net loss applicable to
common shareholders
|
|
$ |
(19,194,236 |
) |
|
$ |
(4,138,298 |
) |
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net
loss per common share
|
|
$ |
(0.16 |
) |
|
$ |
(0.11 |
) |
|
Weighted average shares
of common stock outstanding: basic and diluted
|
|
|
121,154,334 |
|
|
|
27,906,090 |
|
See accompanying notes to the
consolidated financial statements.
NEMUS BIOSCIENCE, INC. AND
SUBSIDIARY
CONSOLIDATED STATEMENTS OF
CASH FLOWS
|
|
|
Year ended December
31,
|
|
|
|
|
2018
|
|
|
2017
|
|
|
Cash flows from operating
activities:
|
|
|
|
|
|
|
|
Net loss
|
|
$ |
(19,194,236 |
) |
|
$ |
(3,094,298 |
) |
|
Adjustments to
reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
1,544 |
|
|
|
8,039 |
|
|
Loss on
disposal of assets
|
|
|
803 |
|
|
|
1,788 |
|
|
Fixed assets
provided to university in lieu of cash
|
|
|
- |
|
|
|
18,004 |
|
|
Stock-based
compensation expense
|
|
|
674,961 |
|
|
|
608,676 |
|
|
Amortization of
warrants and stock issued for services (1)
|
|
|
- |
|
|
|
30,000 |
|
|
Change in fair
value of derivative liabilities
|
|
|
6,503,174 |
|
|
|
(767,198 |
) |
|
Fair value of
warrant liability in excess of proceeds
|
|
|
7,174,634 |
|
|
|
- |
|
|
Financing
transaction costs
|
|
|
137,192 |
|
|
|
- |
|
|
Loss on common
stock issuance from conversion of accrued interest
|
|
|
9,794 |
|
|
|
- |
|
|
Loss on
extinguishment of secured convertible promissory note - related
party
|
|
|
590,392 |
|
|
|
- |
|
|
Amortization of
debt discount
|
|
|
58,536 |
|
|
|
- |
|
|
Common stock
issued for services
|
|
|
- |
|
|
|
187,550 |
|
|
Changes in
assets and liabilities:
|
|
|
|
|
|
|
|
|
|
Prepaid
expenses (1)
|
|
|
198,235 |
|
|
|
(121,273 |
) |
|
Deposits and
other assets
|
|
|
- |
|
|
|
34,290 |
|
|
Other current
assets
|
|
|
(2,609 |
) |
|
|
7,014 |
|
|
Accounts
payable
|
|
|
(85,324 |
) |
|
|
(173,729 |
) |
|
Accrued payroll
and related expenses
|
|
|
11,701 |
|
|
|
(112,825 |
) |
|
Accrued
expenses
|
|
|
(21,811 |
) |
|
|
42,677 |
|
|
Net cash used
in operating activities
|
|
|
(3,943,014 |
) |
|
|
(3,331,285 |
) |
|
Cash flows from investing
activities:
|
|
|
|
|
|
|
|
|
|
Purchases of
property and equipment
|
|
|
(4,385 |
) |
|
|
(19,654 |
) |
|
Net cash used
in investing activities
|
|
|
(4,385 |
) |
|
|
(19,654 |
) |
|
Cash flows from financing
activities:
|
|
|
|
|
|
|
|
|
|
Proceeds from
Series D preferred stock issuance, net of $183,343 issuance costs
(2)
|
|
|
- |
|
|
|
1,131,857 |
|
|
Proceeds from
Series F preferred stock issuance, net of $118,855 issuance
costs
|
|
|
- |
|
|
|
1,881,145 |
|
|
Proceeds from
Emerald Financing, net of $154,092 issuance costs
|
|
|
3,095,908 |
|
|
|
- |
|
|
Proceeds from
Series B warrant exercises
|
|
|
98,700 |
|
|
|
- |
|
|
Proceeds from
secured convertible promissory note - related party
|
|
|
400,000 |
|
|
|
500,000 |
|
|
Proceeds from
convertible multi-draw credit agreement, net of $53,707 issuance
costs
|
|
|
1,946,293 |
|
|
|
- |
|
|
Net cash
provided by financing activities
|
|
|
5,540,901 |
|
|
|
3,513,002 |
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash,
cash equivalents and restricted cash
|
|
|
1,593,502 |
|
|
|
162,063 |
|
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents
and restricted cash, beginning of period
|
|
$ |
264,383 |
|
|
$ |
102,320 |
|
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents
and restricted cash, end of period
|
|
$ |
1,857,885 |
|
|
$ |
264,383 |
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures
of cash-flow information:
|
|
|
|
|
|
|
|
|
|
Reconciliation of cash, cash
equivalents and restricted cash:
|
|
|
|
|
|
|
|
|
|
Cash and cash
equivalents
|
|
$ |
1,853,373 |
|
|
$ |
259,955 |
|
|
Restricted
cash
|
|
|
4,512 |
|
|
|
4,428 |
|
|
|
|
|
|
|
|
|
|
|
|
Total cash,
cash equivalents and restricted cash shown in the consolidated
statements of cash flows
|
|
$ |
1,857,885 |
|
|
$ |
264,383 |
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the period
for:
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$ |
23,334 |
|
|
$ |
- |
|
|
|
|
|
|
|
|
|
|
|
|
Income
taxes
|
|
$ |
1,642 |
|
|
$ |
1,631 |
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures
of non-cash financing activities:
|
|
|
|
|
|
|
|
|
|
Conversion of
outstanding preferred stock into common stock
|
|
$ |
1,947,228 |
|
|
$ |
1,386,000 |
|
|
Conversion of
outstanding preferred stock subject to redemption into common
stock
|
|
|
828,915 |
|
|
|
1,197,450 |
|
|
Fair value of
common stock issued in extinguishment of convertible debt and
accrued interest
|
|
|
1,713,766 |
|
|
|
- |
|
|
Fair value of
warrants issued in connection with financings
|
|
|
10,424,634 |
|
|
|
- |
|
|
Proceeds
allocated to equity classified warrants issued with convertible
multi-draw credit agreement
|
|
|
315,080 |
|
|
|
- |
|
|
Reclassification of warrant liabilities to equity from exercise of
warrants
|
|
|
1,539,866 |
|
|
|
- |
|
|
Fair value of
compound derivative liability issued with convertible multi-draw
credit agreement
|
|
|
204,102 |
|
|
|
- |
|
|
Beneficial
conversion feature on convertible multi-draw credit agreement
|
|
|
90,080 |
|
|
|
- |
|
Supplemental disclosures
of non-cash financing and investing activities:
|
(1)
|
During the year ended
December 31, 2017, warrants issued to service providers for
consulting services were valued at $30,000 and were recorded as a
Prepaid expense and amortized over the service period.
|
|
(2)
|
During the year ended
December 31, 2017 preferred deemed dividends of $333,000 was
recognized on Series F Preferred Stock, $536,000 was recognized on
Series D Preferred Stock and $175,000 on Series C Preferred
Stock.
|
See accompanying notes to the
consolidated financial statements.
NEMUS BIOSCIENCE, INC. AND
SUBSIDIARY
CONSOLIDATED STATEMENTS OF
STOCKHOLDERS’ DEFICIT
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redeemable
|
|
|
|
|
|
|
|
Convertible
|
|
|
Convertible
|
|
|
Convertible
|
|
|
Convertible
|
|
|
Stockholders’
Deficit
|
|
|
|
|
Series F
|
|
|
Series D
|
|
|
Series C
|
|
|
Series B
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
Preferred Stock
|
|
|
Preferred Stock
|
|
|
Preferred Stock
|
|
|
Preferred Stock
|
|
|
Common Stock
|
|
|
Paid-In
|
|
|
|
|
|
Accumulated
|
|
|
Stockholders
|
|
|
|
|
Shares
|
|
|
Amounts
|
|
|
Shares
|
|
|
Amounts
|
|
|
Shares
|
|
|
Amounts
|
|
|
Shares
|
|
|
Amounts
|
|
|
Shares
|
|
|
Amounts
|
|
|
Capital
|
|
|
Warrants
|
|
|
Deficit
|
|
|
Deficit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31,
2016
|
|
|
- |
|
|
$ |
- |
|
|
|
- |
|
|
$ |
- |
|
|
|
386 |
|
|
$ |
293,669 |
|
|
|
4,031 |
|
|
$ |
1,169,663 |
|
|
|
21,563,163 |
|
|
$ |
21,563 |
|
|
$ |
7,163,064 |
|
|
$ |
837,711 |
|
|
$ |
(10,936,573 |
) |
|
$ |
(2,914,235 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued for
services
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
605,000 |
|
|
|
605 |
|
|
|
186,945 |
|
|
|
- |
|
|
|
- |
|
|
|
187,550 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock warrants issued
for services
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
145,200 |
|
|
|
- |
|
|
|
145,200 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock based compensation
expense
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
608,676 |
|
|
|
- |
|
|
|
- |
|
|
|
608,676 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of Series D Preferred
Stock net of issuance costs of $183,343
|
|
|
- |
|
|
|
- |
|
|
|
1,200 |
|
|
|
1,016,657 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of Series F Preferred
Stock net of issuance costs of $118,855 and $103,364 put option
liability
|
|
|
2,000 |
|
|
|
1,777,781 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of Series B
Preferred Stock and conversion liability into common stock at $0.25
and $0.15 per share
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(1,197.45 |
) |
|
|
(347,462 |
) |
|
|
5,910,666 |
|
|
|
5,911 |
|
|
|
350,810 |
|
|
|
- |
|
|
|
- |
|
|
|
356,721 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of Series C
Preferred Stock to common stock at $0.25 per share
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(386 |
) |
|
|
(293,669 |
) |
|
|
- |
|
|
|
- |
|
|
|
1,544,000 |
|
|
|
1,544 |
|
|
|
292,125 |
|
|
|
- |
|
|
|
- |
|
|
|
293,669 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of Series D
Preferred Stock to common stock at $0.25 per share
|
|
|
- |
|
|
|
- |
|
|
|
(1,000 |
) |
|
|
(847,210 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
4,000,000 |
|
|
|
4,000 |
|
|
|
843,211 |
|
|
|
- |
|
|
|
- |
|
|
|
847,211 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beneficial conversion feature
upon issuance of Series C Preferred Stock
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
175,000 |
|
|
|
- |
|
|
|
- |
|
|
|
175,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deemed dividend from beneficial
conversion feature of Series C Preferred Stock
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(175,000 |
) |
|
|
- |
|
|
|
- |
|
|
|
(175,000 |
) |
|
Beneficial conversion feature
upon issuance of Series D Preferred Stock
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
536,000 |
|
|
|
- |
|
|
|
- |
|
|
|
536,000 |
|
|
Deemed dividend from beneficial
conversion feature of Series D Preferred Stock
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(536,000 |
) |
|
|
- |
|
|
|
- |
|
|
|
(536,000 |
) |
|
Beneficial conversion feature
upon issuance of Series F Preferred Stock
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
333,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
333,000
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deemed dividend from beneficial
conversion feature of Series F Preferred Stock
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(333,000
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(333,000
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss for the year ended
December 31, 2017
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(3,094,298
|
)
|
|
|
(3,094,298
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2017
|
|
|
2,000
|
|
|
$
|
1,777,781
|
|
|
|
200
|
|
|
$
|
169,447
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
2,833.55
|
|
|
$
|
822,201
|
|
|
|
33,622,829
|
|
|
$
|
33,623
|
|
|
$
|
9,444,831
|
|
|
$
|
982,911
|
|
|
$
|
(14,030,871
|
)
|
|
$
|
(3,569,506
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock based compensation
expense
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,143,501
|
|
|
|
3,143
|
|
|
|
671,818
|
|
|
|
-
|
|
|
|
-
|
|
|
|
674,961
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock net of
issuance costs of $16,900
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
32,500,000
|
|
|
|
32,500
|
|
|
|
(49,400
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(16,900
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of Series B
Preferred Stock and conversion liability into common stock at $0.10
and $0.001 per share
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,833.55
|
)
|
|
|
(822,201
|
)
|
|
|
28,385,000
|
|
|
|
28,385
|
|
|
|
800,530
|
|
|
|
-
|
|
|
|
-
|
|
|
|
828,915
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of Series D
Preferred Stock to common stock at $0.10 per share
|
|
|
-
|
|
|
|
-
|
|
|
|
(200
|
)
|
|
|
(169,447
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,000,000
|
|
|
|
2,000
|
|
|
|
167,447
|
|
|
|
-
|
|
|
|
-
|
|
|
|
169,447
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of Series F
Preferred Stock to common stock at $0.10 per share
|
|
|
(2,000
|
)
|
|
|
(1,777,781
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
20,000,000
|
|
|
|
20,000
|
|
|
|
1,757,781
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,777,781
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of secured
convertible promissory note - related party and accrued
interest
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
9,037,667
|
|
|
|
9,038
|
|
|
|
1,714,522
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,723,560
|
|
|
Series B warrant exercises
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,218,750
|
|
|
|
5,219
|
|
|
|
1,633,347
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,638,566
|
|
|
Warrants issued in connection
with convertible multi-draw credit agreement, related party
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
315,080
|
|
|
|
-
|
|
|
|
315,080
|
|
|
Beneficial conversion feature
in connection with convertible multi-draw credit agreement -
related party
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
90,080
|
|
|
|
-
|
|
|
|
-
|
|
|
|
90,080
|
|
|
Net loss for the year ended
December 31, 2018
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(19,194,236
|
)
|
|
|
(19,194,236
|
)
|
|
Balance, December 31,
2018
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
133,907,747
|
|
|
$
|
133,908
|
|
|
$
|
16,230,956
|
|
|
$
|
1,297,991
|
|
|
$
|
(33,225,107
|
)
|
|
$
|
(15,562,252
|
)
|
See accompanying notes to the
consolidated financial statements.
NEMUS BIOSCIENCE, INC. AND
SUBSIDIARY
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
1. Nature of Operations
and Business Activities
Nature of
Operations
Nemus Bioscience, Inc. is a
biopharmaceutical company that plans to research, develop and
commercialize therapeutics derived from cannabinoids through a
number of license agreements with the University of Mississippi
(“UM”). UM is the only entity federally permitted and licensed to
cultivate cannabis for research purposes in the United States.
Unless otherwise specified, references in these Notes to the
Consolidated Financial Statements to the “Company,” “we” or “our”
refer to Nemus Bioscience, Inc., a Nevada corpo